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Home prices continue to rise at a rate that can't be sustained over the long term.
Prices blast past $350,000
The median price paid for an existing home rose 23.6% in May compared with 12 months earlier, according to the National Association of Realtors. The median price exceeded $350,000 for the first time, settling at $350,300 for the month.
For the third month in a row, the year-over-year price increase was the biggest in the history of the NAR's monthly survey. Prices have risen by double digits for 10 months in a row.
But 2020 was an anomalous year. Home sales plunged from April through June 2020, following springtime shutdowns due to the COVID-19 pandemic. Appreciation slowed during that period before prices roared back starting in the summer.
When you compare prices from May 2019 (the most recent "normal" spring) to May 2021, the results are still sobering. The median home price rose 25.9% during that period. Two-year price appreciation has been above 20% for nine months in a row.
Rapid appreciation can't continue forever
If prices continued rising at May's pace — by 25.9% every two years — the cost of an existing home would almost double in six years. At that rate, the median house price would be on the verge of $700,000 in May 2027 and it would eclipse $1 million in 2031.
It's plain to see that this pace of price appreciation can't last. If it continues, few Americans will be able to afford houses in a few years.
Faintly good news on supply
Rapidly rising prices are a sign that not enough homes are for sale to meet demand. Sellers hold most of the power in negotiations.
In housing lingo, "months supply" refers to how many months it would take to sell all the homes on the market at the current month's pace. When the supply is six months, buyers and sellers are roughly on equal footing. May's supply was 2.5 months — a strong seller's market.
May's 2.5 months was an improvement (from a buyer's viewpoint) over April's 2.4-month supply. There were 1.23 million houses for sale at the end of May, up 70,000 from April's inventory.
What it means for buyers and sellers
An average of 1.3 million new households were formed each year from 2016 to 2019. If that pace of household formation persists, it makes you wonder where people are going to live — especially those who prefer to own rather than rent. Housing affordability could become an important issue in the next presidential election.
There's not a ton of data to back this up, but one might surmise that the surge in prices is preventing some homeowners from putting their dwellings on the market. They know that they'll sell their homes for a lot of money, which tempts them to sell. But they also know that they'll pay elevated prices for their next homes, so they stay put.
It's anyone's guess how this rapid price growth will end, but it inevitably will.
Media: If quoting from this Commentary, the source is Holden Lewis, NerdWallet mortgages expert.