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Why Home Prices Should Continue Rising (at Least for Now)

The current dynamics of the housing market strongly suggest that prices will continue rising for the foreseeable future, as the inventory of listed homes remains well below a critical threshold.

Like any other good or service, the price of a house is set by supply and demand. If supply is high relative to demand, prices will typically fall. But if demand is high relative to supply, the opposite holds true and prices rise.

At present, there's no question that demand for homes is outstripping supply. "We need a housing supply of over six months to have a generally balanced market between home buyers and sellers," explains Lawrence Yun, chief economist of the National Association of Realtors.

Meanwhile, as you can see in the chart below, the latest reported figure was 5.2 months -- that is, at the current sales rate the entire inventory of listed homes would theoretically sell through in less than six months.

Just to be clear, predictions like this are fraught with peril. In the first case, the most recent inventory data dates back to February. As such, it's reasonable to conclude that the figure was weighed down by unusually severe weather earlier in the year.

In the second case, there are a handful of green shoots that could swing the equation back in buyers' favor. Homebuilder sentiment, while still downtrodden, is trending up. In the latest reading, it increased 2.2% over March and 14.6% over April of last year. Additionally, the Commerce Department reported last week that housing starts rose in March by 2.8% over February.

Will these forces be sufficient to tip the balance in the housing market? Absolutely. But it'll take time. And until then it's likely to remain a seller's market.

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John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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