Prices in any market are determined by supply and demand. In the past seven years, home prices have proven that. Real estate prices peaked as the home construction industry boomed. When the number of new homes available to buy fell to a 50-year low in 2012, prices bottomed.
Now the number of existing homes for sale is at historic lows. The National Association of Realtors reports that there is a 4.5 month supply of homes on the market. This is well below the long-term average of 7.3 months, which includes all data from 1983.
Bottoms are not always followed by gains.
Investors always seem to expect rapid gains whether they are looking at stocks or real estate. Once in a while, their wished are granted. Stock prices, for example, have more than doubled in less than four years, erasing the pain of a 55 percent drop that ended in 2009.
That gain is unusual. Prices took more than 15 years to reach old highs after other bear markets, and despite the large gains of the past few years, the Standard & Poor’s 500 is still trading at about the same level seen in 2000.
Other stock market indexes are nowhere near their old highs. The Nasdaq 100 index remains more than 40 percent below its 2000 highs.
Individual real estate markets will follow this pattern. Some will reach new highs soon and others will struggle for decades. The good news is that a large drop in value seems unlikely in the future as excess supply has been removed from the market.
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