Have you ever wondered how home prices can continue to soar in Colorado, or wherever you may own a home? There are a lot of factors that influence home prices, which mostly depend on supply and demand.
Let’s talk about supply and demand first. If a resource is scarce, yet there is demand for it, the price will increase, to a point. With homes, as long as buyers have the means, desire and opportunity to purchase a home, their purchase behavior will determine the price. In many home purchase decisions, a mortgage is often the factor that limits the buyer’s ability to pay a certain price. In Colorado’s current market, there are a number of cash buyers. And if buyers do not need a mortgage, they also do not need an appraisal to establish the fair market value of a home.
Another factor is price elasticity. This means the price range a product can sell for, plus what volume or quantity of purchases will occur at a given price. Gasoline is a good example of price elasticity. If there are two competing gas stations within sight of each other with the gasoline prices prominently displayed, the gas station with the lower price generally sells more gas. But if the price is only slightly different, there may be little difference in quantity between the two.
In Longmont, and much of Northern Colorado, home prices have been going up at a rate of about 9 percent per year. Since the rate is lower in other parts of Colorado, the elasticity idea would suggest there would be fewer home purchases.
However, with homes, the idea of elasticity isn’t quite that simple. Many buyers are reliant on a mortgage, but some are not. Some are relocating from another part of the country. Some have a savings account that can be used to purchase a home outright. Others are investors who purchase homes and rent them. And still others are selling their existing home and using the equity as a down payment for their next home.
Each of these examples results in home buyers determining the ultimate value of the home they will purchase. Multiple buyers from these various circumstances can easily bid up the price of a home. The only restraints are the buyers’ financial resources and their willingness to agree on a price, especially with cash deals.
Finally, population growth or shrinkage is a factor connected to upswings. The population of Colorado has grown at approximately 95,000 net new residents per year. Colorado is a great place to live, as evidenced by how the number of people moving out of state is outpaced by the number moving in. That trend isn’t expected to let up for several years.
Many of these new residents want to purchase a home, yet few local residents are eager to sell, that is they don’t want to move, creating scarcity. In addition, new home construction is active, but not at the pace needed to supply the. Compounding the problem, new housing construction starts were down 6.7% in March.
When you have all three – high demand, people willing to pay more than the market would expect, and a home-buying population that is growing faster than the supply of homes – you can expect an upswing in prices. So, for now, at least in Colorado, we predict that housing prices will keep going up.