High supply leads to lower prices; low supply leads to higher prices. CoreLogic reports that housing inventory is at its lowest level in more than five years; therefore, we shouldn't be surprised prices are on the rise.

In short, sellers are holding back, and for good reason: they expect to get an even higher price in the future. This is the opposite of what we were seeing a couple years ago. Back then, the expectation was that home prices would continue to fall. When a seller thinks he will get only a lower price, he will move to sell immediately. On the other side, a buyer who thinks he will get a lower price will wait to buy. These expectations produced falling prices and rising inventory that so hampered the recovery.

Today, we are seeing more of the opposite: More buyers are motivated to buy because they expect higher prices, while more sellers are motivated to withhold their homes because they expect higher prices. These dual actions are why prices are rising and inventory is falling in many markets.

The current trend is certainly preferable to the former trend. As the current trend continues to develop, it becomes even more risky to procrastinate buying, because a higher purchase price can easily offset a low lending rate.

Courtesy of Jessica Regan.

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