We have seen home prices move up since 2010 and even more since the summer of 2020. Our parents have seen home prices move up from when they first purchased a home. Let’s take a look at three reasons for this.
HOME SIZE
The average square footage of houses over time has gone up. The house I live in now is about 40% larger than the one I grew up in. The next home I build, or purchase will likely be at least 50% larger than the current one I live in. Across the country home builders are building larger homes because that is what the consumer wants. We all want larger houses. As the square footage increases so does the cost of the homes.
HOME FINISHINGS
HGTV has helped over the years increase our demand for luxury homes. We used to go hotels for luxury and now we want luxury in our homes. Kitchen countertops started as wood countertops, then tile, then laminate, granite, now quartz and marble. As each of these countertop choices have changed over time, each cost is more than the other. Flooring choices have gone from standard wood, to birchwood, oak, engineered hardwood, porcelain tile and marble bathrooms. Each of these choices has different price points and most of us want the higher price point materials. The demand for the higher end materials increases the price of a home.
INTEREST RATES
Interest rates are a major factor in the reason why home prices have increased. This maybe one the largest contributors to the increase in home values. Interest rates have decreased over the last 3 decades making it easier for home buyers to continue buying homes for higher prices. Let’s assume you can afford a monthly payment of $2400 a month on a mortgage. The lower the interest rate the larger a loan you can afford and a larger amount you can offer to buy a home. Look below at how the difference in interest rates can impact the dollar amount of a loan you can afford.
| PAYMENT | INTEREST RATE | LOAN AMOUNT | |
| MORTGAGE A | $2403.14 | 3% | $570,000 |
| MORTGAGE B | $2403.60 | 6% | $400,900 |
| MORTGAGE C | $2400.19 | 9% | $314,000 |
Below take a look at how the mortgage interest rates have decreased over time making it easier for home buyers to afford larger homes and larger mortgage loans.
The low rates help to inflate home values. Since the peak in 1984 of 21.46% mortgage payments have been coming down making it easier for more people to buy homes and pushing up the demand. The low rates are attractive to investors also. I hope this short explanation gives some insight to you on why home prices continue to rise.