Let’s talk about home price appreciation. We’ve certainly had a lot of it in the past year! And I get people asking all the time whether I think prices might go down in the near future. It’s natural to be concerned — many of us were homeowners during the Great Recession, when homes did lose significant value. But just because it happened before doesn’t mean it has to happen again. And I don’t believe there’s any kind of timeline that says it has to happen every so many years. So, let’s first explore what we’ve seen lately, and then I want to talk about the reasons.

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Like many Realtors, I’m a fan of Ryan Lundquist’s Sacramento Appraisal Blog. He’s an appraiser who posts a big market update once a month and other interesting articles in between. Here’s a table from his last update, showing Sacramento County median home prices were up 21.6% in July from the year before. That’s huge, and we’ve all been impressed, shocked, excited, or discouraged by that, depending on whether you’re a owner, seller, or buyer.

So, why such a huge run-up in prices this year? Is this sustainable? Here’s my list of reasons, and I think it’s useful to divide these up into temporary and ongoing factors to help us consider what might be coming:

Temporary (or potentially temporary) factors:

  • Super-low interest rates.
  • People wanting to move because of Covid (maybe leaving the big cities because they’re no longer fun in a lockdown or  moving closer to family).
  • FOMO – Fear of Missing Out — sometimes the momentum in the market simply creates more momentum, but this will settle down over time.

Ongoing factors:

  • Millennials! Many are in their prime homebuying years now, and they’re the largest generation this country has known (bigger than the Baby Boom!).
  • Millennials’ babies! As this generation starts raising children, many who had lived in urban apartments have been moving to suburban communities with higher-rated schools, more parks, and greater public safety.
  • Ability to work from home. Some companies are calling workers back to their offices, but many have decided work from home was OK during the pandemic, and they’re letting people do it permanently.
  • And maybe I left the most important long-term factor for last: the HOUSING SHORTAGE! California is especially suffering from this, as all across the state, we have not been building homes as fast as population growth. This has been going on for a long time, and it’s partly related to regulation, environmental concerns, and NIMBYism (people who shout at their city councils and say “no way” to new housing in their neighborhood – especially to apartments and other multifamily housing).

Here’s an example of the housing shortage in action. The graph below shows the growth in the number of households (families or other groups of people living together) in Sacramento County compared to the growth in all housing units.

What does this mean for the future?

Well, I’ve gone a bit long here, so let me be brief: I can’t predict the future! But here are a few thoughts… The short-term drivers of home-price appreciation will settle down in the coming years. But the ongoing factors I mentioned above will likely be with us for a long time. I can’t imagine a magic fix to the supply problem of not building enough housing. It will take years to catch up, if we ever do. If we don’t catch up, we’ll continue becoming a very high-priced market, like San Francisco, New York, Vancouver, or London (I have a kid who lives in London – tell me about it!).

So, bottom line, I doubt there’s a bubble getting ready to pop. I think the forces driving demand and limiting supply are slow-moving and lingering. The last bubble was driven by bad lending practices. We don’t have that in the market these days. Lending standards are still high.

OK, enough. Hopefully, you’ve gotten some useful information out of this. Let me know what you think!