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.
Looking for 1 stock that could make you rich?
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.