With home prices up about 15% in San Luis Obispo County and inventory of unsold homes at it’s lowest point in eight years, many people want to know where the housing market is going. To answer this question it helps to look back at where we have come from.

In real terms, home prices are about the same as they were in 1990.

In real terms, home prices are about the same as they were in 1990.

Comparing the median sales price information from the California Association of Realtors and inflation numbers from the California Department of Finance, an interesting fact becomes evident. Prices today are the same as 1990 prices after adjusting for inflation. Despite beginning and ending at a similar number, the trend lines are nothing alike. Home prices lagged behind inflation in the 1990’s, surged past it in the 2000’s and then started falling again in 2007.

Aside from the very low inventory, one factor is having an extraordinary impact on the prices of homes. Mortgage interest rates hit their lowest point ever at the end of 2012. In January, 1990, interest rates were almost 10% – today they are 3.5%, according to Freddie Mac. The difference between 3.5% and 10% is roughly a doubling of the monthly payment.

Other factors are having an effect as well. Rents are up, the economy is improving and foreclosures are slowing to a crawl. According to The Economist, homes in the US are undervalued 7% based on the price-to-rents ratio and 20% undervalued according to the price-to-income ratio.

Until there is more inventory of unsold homes or a sizable increase in the mortgage interest rates, there should be continued appreciation of home prices.

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