Though this may seem like a counterintuitive statement, it is very possible that higher home prices could lead to an increase in overall home sales. Two Federal Reserve Bank of San Francisco senior economists, William Hedberg and John Krainer think so as explained in an Economic Letter titled Why Are Housing Inventories Low?  It’s not that higher prices will entice buyers, but rather, they may motivate sellers to help increase inventory.

Higher Prices Will Entice Sellers

For-sale inventories have been slow to rebound from the Great Recession even though home prices have increased steadily since 2012.  Hedberg and Krainer theorize that prices are still not high enough to entice many sellers.  For some this is because the value of their home is still below the outstanding balance on their mortgage, meaning that sellers would have to bring cash to the closing.  For others it may be that their equity is not back to a level that motivates them to sell.

Economic theory suggests that all homes are for sale if the price is right, but at any point in time, the price may not be right. Sellers have their own ideas about what is “right” and must also consider that selling a house can be costly because of brokerage fees, and necessary or cosmetic changes to the house.  For these reasons and others the active listing a home is viewed by economists as a strong signal of an intent to sell and they measure the short-run supply of homes for sale, the inventory, by the listing numbers.

Good times or bad, there is always some level of inventory in the housing market.  Some owners sell to move up, others to downsize, others move for employment reasons, or to free up cash.  These are life-cycles motives not necessarily tied to the business cycle and produce a general level of churning in the market.  Nevertheless, the authors say there is a distinct cyclical pattern to inventories which rise in good times and fall in bad times.

The relationship between inventory and prices may have broken down for an extended period as the market rebounded in 2012 because of fallout from the housing boom and bust.   The boom saw an unprecedented rise in homeownership rates with younger households more willing to buy and eased lending allowing in less qualified borrows.  When those trends reversed the inventory shifted from homes for sale to homes for rent with the later rising steadily during the recession and the for-sale inventory dropping and only recently stabilizing.

 

 

Source: Mortgage News Daily