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The 5 Major Factors That Cause Home Prices to Fluctuate

Read Time: 4 Minutes October 08, 2021

Whether you’re looking to buy a new home or sell your current one, identifying some of the major factors that cause home prices to fluctuate is essential. While the reasons that home prices fluctuate can be complex, the benefit of knowing them is simple — by identifying the factors, you can more easily buy or sell a home for the best price possible. Understanding these influences will help to ensure you price your home accurately and prevent it from sitting on the market for too long.

Keep in mind, these five areas aren’t independent of one another and could very well impact the other. So without further ado, here are the five major factors that can cause home prices to fluctuate.

Two house images with arrows pointing in cycle

1. Economic change

One of the biggest influences in real estate fluctuation is the health of the economy. This is typically measured by indicators like employment data, manufacturing activity, the price of goods, and Gross Domestic Product (GDP) — which represents the total dollar value of all goods and services over a period of time. When the economy is thriving and unemployment is low, home prices tend to increase. Generally, this is because people have a heightened sense of job security and confidence to take on mortgage debt.  

However, home prices tend to drop when there is a downturn in the economy. Falling incomes or job loss will mean the general population can't afford, or simply aren't financially confident enough, to buy houses they once could in a strong economy. As a result, housing demand declines, which causes motivated sellers to lower their asking price to get a sale — also known as a homebuyer’s dream! One of the most notable examples of price depreciation in the United States was during the 2008 housing bubble, largely due to the economic recession.

2. Supply and demand

Housing prices are affected by supply and demand in the same way that goods and services are. Since every housing transaction has a buyer and a seller, a low or high supply of homes can drive prices up or down. When the supply is low and demand is high, this would be considered a seller’s market. In this instance, bidding wars are very common. On the flip side, it’s considered a buyer’s market when the supply is high, but the housing demand is low. With an oversupply of properties, home prices tend to fall and sit on the market longer than sellers would like.

Pro tip: A great way to keep tabs on supply and demand is to follow mortgage news in major media, or even just keep an eye out for the abundance (or lack thereof) of “for sale” signs in various neighborhoods.

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3. Mortgage Interest rates

After looking at current economic data, the Federal Reserve has the authority to raise or lower interest rates at specific times throughout the year — which can impact the mortgage rates set by lenders. This happened most recently in December of 2018 when the Fed raised its benchmark interest rate from 2.25 to 2.5.

With that said, changes in interest rates can impact the price of homes and a homebuyer’s ability to purchase one. This is because the lower interest rates fall, the lower the cost of a mortgage will be, thus increasing the housing demand and pushing asking prices up. Simply put, low mortgage rates encourage homebuyers to take out home loans, which is ideal for home sellers. The opposite can happen when interest rates rise. In this scenario, your monthly mortgage payment will increase and cause homes to become less affordable.   

Using a Monthly Mortgage Payment Calculator can help you get an idea of how interest rates can impact your mortgage payment.

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4. Location

Even when home prices fall on a national level, prices in a specific location may rise — and vice versa. This is due to desirability. Some location factors that can influence housing prices include:

  • Neighborhoods

  • Highways

  • Attractions

  • Hospitals

  • Schools

If you’re looking to buy a home in an area with a recent surge of restaurants, attractions, and good schools, home prices will be higher than areas lacking in these characteristics. Other factors that can cause price fluctuation are things like crime rate, access to quality healthcare, and proximity to highways.

Another influential factor is employment changes, specifically when a large corporation opens and brings hundreds of jobs to an area. People can flock to this region and cause housing prices to increase, especially if new homes aren’t being built fast enough to keep up with demand. But if businesses begin to fold and infrastructure declines, folks may have to leave for new opportunities — ultimately creating less demand and causing prices to fall.

5. Government laws

There are a couple of notable ways government forces can impact home prices. First is through mortgage interest tax deductions. Currently, homeowners can deduct mortgage interest on loans less than $750,000. Tax breaks such as this one can incentivize more homebuyers, thus creating the potential of a rise in home prices. Another governmental influence is through tariffs. Housing materials like steel, aluminum, and lumber are sometimes imported from other countries. And imposing tariffs on these foreign supplies can increase the cost of building new homes — swaying housing prices as a whole.

We hope you have a deeper knowledge of what can affect home prices and what these factors can mean for homebuyers, home sellers, and the housing market altogether. If you’re a first-time homebuyer ready to start your journey, see Why It’s Important to Build Wealth with Homeownership

Learn more in our other educational series.

We’ve assembled a treasure trove of jargon-free information to demystify home-financing and arm you with valuable insights and actionable options.

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