In the ever-fluctuating landscape of the real estate market, one thing seems to be certain: home prices are on an upward trajectory, seemingly impervious to the fluctuations in interest rates. Despite periodic shifts in economic indicators, several factors indicate that this trend is likely to continue. Here are the top three reasons why home prices are poised to rise, even in the face of interest rate changes, with a special focus on the proposed tax credits for first-time homebuyers by the current administration:

Limited Inventory

One of the most significant contributors to the continuous rise in home prices is the persistent imbalance between supply and demand. The demand for housing has remained robust, driven by factors such as population growth, household formation, and migration patterns. However, the supply of available homes has failed to keep pace.

This scarcity of inventory puts sellers in a favorable position, allowing them to command higher prices for their properties. As competition among buyers intensifies for the limited number of homes on the market, bidding wars become more common, further driving up prices. Even with fluctuations in interest rates, the fundamental mismatch between supply and demand continues to exert upward pressure on home prices.

Moreover, the COVID-19 pandemic has exacerbated the housing shortage by disrupting construction activity and slowing down the pace of new housing starts. As a result, the gap between supply and demand is unlikely to narrow significantly in the near term, sustaining the upward trajectory of home prices.

Government Incentives and Policies

The proposed tax credits for first-time homebuyers by the current administration are expected to further stimulate demand in the housing market. These incentives aim to make homeownership more accessible and affordable, particularly for individuals or families entering the market for the first time. By providing financial assistance or tax breaks to eligible buyers, the government seeks to incentivize home purchases and spur economic activity in the housing sector.

The introduction of such policies is likely to attract a new wave of buyers into the market, adding to the already robust demand. With more prospective buyers vying for the limited supply of homes, competition is set to intensify, driving prices higher. Additionally, the ripple effects of increased demand are expected to extend beyond the entry-level segment, impacting prices across the entire housing market.

Historically Low Interest Rates and Homeowner Inertia

Another factor contributing to the continuous rise in home prices is the phenomenon of homeowner inertia fueled by historically low interest rates. Many current homeowners who have mortgages are enjoying exceptionally low rates, often obtained through refinancing in recent years. With their mortgage payments at manageable levels, these homeowners have little incentive to sell their properties and upgrade to new homes.

This reluctance to move, also known as “homeowner inertia,” further constrains the already limited inventory in the housing market. As existing homeowners choose to stay put rather than list their properties for sale, the supply of available homes remains suppressed. Consequently, prospective buyers face heightened competition for the limited number of homes on the market, driving prices higher.

While low interest rates have facilitated homeownership and mortgage refinancing for existing homeowners, they have inadvertently contributed to the inventory shortage by disincentivizing mobility within the housing market. Even if interest rates were to rise slightly in the future, many homeowners with ultra-low mortgage rates may still opt to stay in their current homes rather than incur higher borrowing costs elsewhere.

This phenomenon of homeowner inertia, combined with historically low interest rates, further exacerbates the imbalance between supply and demand in the housing market, perpetuating the upward trajectory of home prices. As long as existing homeowners remain reluctant to sell and upgrade due to favorable financing conditions, the scarcity of available homes is likely to persist, sustaining the competitive environment that continues to drive prices upward.