Lack of Inventory Could Drive Home Prices Higher This Summer

A lack of houses for sale has had two main effects: it has reduced the selection of homes that consumers can choose from while making those that are available more expensive than they might otherwise be.

Higher prices have had some positive effect, helping homeowners regain some lost equity, but the lack of inventory has mostly been a negative, keeping down the number of home sales.

That now appears to be shifting as Realtor.com's Advance Read on June Trends finds inventories are rising. It says that could lead 2015 to be the best year for housing since the bubble-peak year of 2006.

Rising rates a factor

“Factors lending themselves to the market’s upswing are the psychological effect of recently increased mortgage rates as well as the specter of the Fed raising interest rates later this year, said Realtor.com chief economist Jonathan Smoke. “Although demand has been strong all year, in June we’re finally beginning to see an uptick in supply as sellers become more confident about home prices.”

But the rise in home prices may be slowing – which you might expect with rising inventories – and that could have the short-term effect of spurring sales.

"What we're seeing is the passing of the baton, as mortgage rates begin to rise and incomes and household formation rates increase – from a stimulus-driven housing market to one driven by fundamentals," said Dr. Stan Humphries, chief economist at Zillow, a competing real estate site. "This transition from housing recovery to a more normal market is a good thing in the long-term, but we can expect some bumps along the way. In the end, increasing household formation and stronger income growth should be able to overcome the headwind of rising mortgage rates and return markets to health."

First time buyers are back

Realtor.com says other demand drivers include an increase in the number of first time home buyers – many of whom are Millennials who previously had been held back by challenging market conditions.

Realtor.com carefully analyzes its site traffic to monitor consumer behavior and is able to break it down along demographic lines. In June, it added a survey and found 65% of older Millennials said they intend to purchase a home within 3 months – an increase of 12% compared to just 6 months ago.

Smoke says the National Association of Realtors' announcement this week, which stated that May's pending home sales hit a 9-year high, joins a growing collection of optimistic indicators.

“All show both demand and supply improving, foretelling further gains this summer,” Smoke predicted.

Hottest markets still in California

Some areas are experiencing this improvement faster than others. Three of Realtor.com's hottest June housing markets are in California – San Francisco, Vallejo-Fairfield and Santa Rosa – and its Top 20 list includes 5 other California metros But the list also includes Detroit at number 9, Billings, Mont., at 14 and Ft. Wayne, Ind., at 20. Nationally, the median list price increased to $233,000, up 7% year-over-year and 2% over May.