The housing market is a key component to the entire U.S. economy. Having said that, nearly everyone should have an interest in the direction of the housing sector. It is a rather prominent indicator as to the direction the country is heading. However, for those invested in the industry, it hits home on a more personal level. Homeowners, and investors in particular, are at the mercy of the housing market – good or bad as it may be. If you already own a home, you are well aware of the impact a particular market cycle has on net worth. If you are in the process of buying a home, the market will dictate how much you will have to pay. To help you understand what drives home prices, this article will address four factors that have an impact on the housing market.
Supply & Demand
As perhaps the most basic concept of economics, supply and demand will dictate the direction of the housing market. It is relatively simple, even to those that neglected to pay attention in Econ. 101. The more houses that are available at a given time, the less competition there will be. Conversely, if a desirable neighborhood is void of sellers, the prices will rise, as more people will be competing over the same properties. Supply and demand will result in one of two market conditions:
A Sellers Market: When the market demand for properties in a particular area is high and when there is a shortage of good quality properties (i.e. supply is scarce) then the balance of power in the market shifts towards the seller. This is because there is likely to be excess demand in the market for good properties. Sellers can wait for offers on their property to reach (or exceed) their minimum selling price.
A Buyers Market: Conversely when demand both for new and older housing is weak and when there is a glut of properties available on the market, then the power switches to potential buyers. They have a much wider choice of housing available and they should be able to negotiate a price that is lower than the published price.
Of course, the housing market is not always so easy to delineate between the two. It can be very difficult to determine all of the factors that impact supply and demand. For example, it is possible for prices to rise in a neighborhood where there is a large amount of available inventory if the demand is high enough. Therefore, it is important to understand what factors are affecting demand, right down to the smallest detail. This could include a local school district, or even a transit system.
With the cost of homes in today’s market, it is not uncommon to require the assistance of a lender. While the best investors prefer paying cash, the average investor will need the cooperation of a lending institution. Having said that, interest rates play a major role in the purchasing of a home, and subsequently the entire housing market. Low interest rates, in particular, can positively affect the demand for housing. Paying less on your mortgage is an attractive incentive. Those who are on the fence may be swayed into purchasing a home if interest rates are low enough. As for those that already own a home, they may be encouraged to upgrade if rates are conducive to the trade up. When rates are rapidly increasing, there may be a surge in sales as buyers attempt to close deals before they are squeezed out of the market due to higher borrowing costs. While this is true, if rates continue to rise, they will likely reach a point where they become a burden.
Of the factors that impact the housing sector, mortgage rates are the one aspect that buyers have some influence over as an individual. There are steps you can take to make sure you get the best mortgage rate. In fact, buyers with great credit (mid-700s and above) will qualify for the best rates.
Availability of Funds
As discussed, low interest rates can prompt significant activity within the housing sector. However, those rates are of little help if a borrower is unable to secure funding in the first place. Financial institutions are not interested in making loans without considering the risk involved. If there is a weak or declining economy, buyers with marginal credit or relatively low personal cash flow may find it especially difficult to obtain a loan. When the economy is booming, lending standards may be loosened and the housing market can be further stimulated.
The Stock Market
The stock market has a major impact on the entire economy as a whole. Therefore, it should come as no surprise to learn that the performance of the stock market dictates the direction of the housing sector. The same holds true for those that don’t even have any investments directly tied into the market itself. Since most people participate in the stock market in some way, it is a factor that impacts the vast majority of potential and current homeowners. This doesn’t even account for the psychological impact a poorly performing market can have on the greater population.
If you have aspirations of making a financially sound transaction, it is important to understand the factors that impact the housing market.