The Road to Recovery: 4 Factors That Affect Home Prices

Posted on May 11 2015 - 3:56pm by Suzanne De Vita

recoverWith housing on a steady path to recovery, home prices have risen approximately 20 percent in the last three years, according to the Federal Housing Finance Agency (FHFA) and Standard & Poor’s (S&P) Case-Shiller house price indices – and both consumers and industry professionals expect that upward trajectory to continue this year.

The anticipated increase is the result of intersecting economic indicators – macro-level factors painting the big picture that is today’s housing market.

So what’s impacting prices these days?

Wages and Inflation - As much as the economy’s improved, a recent RealtyTrac analysis illustrates disconnect between house price growth and wage growth. Between 2012 and 2014, home prices increased by 17 percent; wages, in contrast, increased 1.3 percent – a 13 to 1 disparity. Furthermore, home prices continue to outpace inflation rates, growing twice as fast in 2014, according to S&P.

But inflation rates as they stand likely affect home prices indirectly, argues renowned economist and Nobel Laureate Robert Shiller. Because pay increases often boost perceptions of buying power, inflation may have a greater impact on consumer confidence, which, in turn, could ignite housing activity.

Interest Rates and Inventory - Inflation rates, however, do tend to influence interest rates. While it’s reasonable to assume rising mortgage interest rates equal falling house prices, in truth, there’s little evidence of a causal relationship between the two. In fact, higher mortgage rates have a tendency to predicate a decrease in purchases, rather than a dip in prices, concludes Mark Palim, Fannie Mae Vice President, Economic & Strategic Research Group.

That said, interest rates do play a role in overall affordability. In many markets, today’s rates have significantly propelled demand.

“The biggest factor in price gains has been the current low interest rates spurring demand,” says Gabe Sanders of BlueWater Real Estate in Stuart, Fla. “And our low inventory, which makes buyers willing to spend more, since they can’t find enough available lower-priced properties.”

In Sanders’ market, prices on the lower end have risen much more than those of mid-range homes, with the largest gains seen under $400,000 in Martin County and under $200,000 to $250,000 in St. Lucie County. This demonstrates what many nationwide are experiencing – escalating prices, due to a shortage of affordable listings, have adversely tipped the scale, especially for first-time homebuyers.

To counter the lack of inventory and rise in prices, new construction gains are essential, says Lawrence Yun, chief economist for the National Association of REALTORS®. Post-crash, single-family construction has been slow to pick up steam, primarily because of construction costs that fail to meet buyer expectations.

Demographics - In addition, generational shifts have historically affected demand and moved prices in the housing market. Currently making waves are baby boomers and millennials, though many of the latter have been priced out due to statistically lower incomes and sluggish wage growth. And like toppling dominos, too few first-timers bodes ill for move-up buyers or those seeking to relocate.

International interest can also drive home prices, particularly in luxury markets. In Beverly Hills, Calif., global demand, coupled with the area’s high-end status and pleasant climate, impacts prices considerably, says Endre Barath, Jr. of Berkshire Hathaway HomeServices California Properties.

“Prices in the 90210 zip code are trending upward and are getting close to an all-time high,” Barath says. “Looking at the current rate of sales versus the current inventory, we are still in a seller’s market, but getting close to a balanced market.”

Oil Prices – Another distinct market trend could also affect home prices in the near future. Following the decline in oil prices, markets with oil economies, such as Texas, Louisiana and Oklahoma, may see home prices drop at the end of this year and into 2016, Trulia reports. Conversely, non-oil-producing markets, particularly in the Northeast and Midwest, may see a boost in prices. These findings mirror oil and home price fluctuations since the 1980s.

While there are many more variables factoring into the equation, house prices remain subject to these predominant large-scale influencers. I put it to our readers – where do you think prices are headed?

Gabe Sanders is a REALTOR®, e-PRO, SFR with BlueWater Real Estate Services in Stuart, Fla. To connect with Gabe, visit

Endre Barath, Jr., “The Land Man,” is a REALTOR®, CRS with Berkshire Hathaway HomeServices California Properties in Beverly Hills, Calif. To connect with Endre, visit or email

4 Comments so far. Feel free to join this conversation.

  1. Eduardo Brandt May 14, 2015 at 8:12 am -

    These four factors mentioned may have some effect on home prices, but I have to question: What effect did they have on the last decade, when we experienced the most significant ever cycle of boom and bust? The answer is not much, if any. That biggest increase in home prices occurred almost exclusively because of access to very easy financing options; and buyer sentiment, in other words, buyer’s expectation that prices would continue to increase. That resulted in buyer demand that outstripped the available inventory supply in almost every market, as sellers decided not to list, or to list at higher and higher prices.

  2. Jim Rooks May 14, 2015 at 8:52 am -

    FYI regarding price of oil vs housing prices. A recent analysis by Dr. James Gaines at the Texas A&M Real Estate Center concludes “history shows that Texas’ housing does not depend on high oil prices. In fact, the state’s housing market has thrived at prices within a wide range of oil prices lower than those experienced in 2013 and the first half of 2014.”

    The article is at

  3. Andrew Bednarik May 16, 2015 at 10:16 am -

    All this home price info. is interesting yet prices where we live have not increased at all since the “Crash” and ,indeed continue to drop throughout the entire state. We have been waiting to move south for 5 years now.

  4. Hank Miller May 26, 2015 at 11:04 am -

    Recovery? What’s old is new…

    “It’s the economy, stupid” This administration has no answers but to spin. The idea that 30 hour a week minimum wage jobs constitutes a “recovery” fails at every level except hype.

    Most people lack confidence and are a heartbeat away from trouble, people in that position buy food and gas,not homes.