There are multiple factors that come into play concerning the health of a real estate market. A buyer and seller need to be aware of where in the real estate market cycle they find themselves.
If you are a first-time home buyer and you feel that the market is slowing down for sales, you may wish to "time" your purchase to give you the most leverage. Alternatively, if you are selling to "move up or downsize," depending on where in the cycle you are may affect your strategy in selling.
Regardless of where you find yourselves in the real estate market, the same factors of recession, expansion, supply and demand come into play.
• Recession and Expansion. There are times when the economy is brisk, and everyone feels confident about his or her prospects for the future. As a result, they spend money. People eat out more; buy new cars, and … they buy new homes.
Then, for one reason or another, the economy slows down. Companies lay off employees and consumers are more careful about where they spend money, perhaps saving more than usual. As a result, the economy slows even further. If it slows enough, we have a recession.
During such a time, fewer people are buying homes. Even so, some homeowners find themselves in a situation where they must sell. Families grow beyond the capacity of the home, employees get relocated, divorce occurs – as well as death – while some people may even find themselves unable to make their mortgage payment, perhaps because of a layoff in the family.
• Supply and Demand. When the supply of available houses is greater than the supply of buyers, appreciation may slow and prices may even fall, as happened in the early 1980s and the early to mid-1990s.
If you are lucky enough to purchase a home during a slow period, you can be reasonably certain that the economy will begin to show strength again. At times, real estate values may even surge drastically. In many regions of the country, this is precisely what occurred in the late 1980s and 1990s.
You should also be conscious of area demographic trends for population changes and employment. If the population of an area is increasing at a rate greater than normal, you can be assured that the demand for homes will outpace the supply over time.
Can anyone say Florida, California and Las Vegas – for home price appreciation of 20 percent, 30 percent, even 40 percent a year, year after year?
So, should you try to "time the market"?
One problem with attempting to time your purchase to the business cycle is that no one can accurately predict the future. Another challenge is that interest rates are generally higher during a depressed market and income may not be keeping up. For that reason, fewer people can qualify for a home purchase than in more prosperous times.
We appear to be experiencing this type of environment in today's market.
Why you should not wait: This strategy generally works best for first-time buyers. A first-time buyer can potentially enjoy waiting for a market to soften, but that can be a double-edged sword.
When interest rates tend to rise, a softening housing market is typically created. A buyer's disposable income tends to decrease since all goods increase in price. Then a buyer's ability to qualify and afford the home of his/her dreams decreases.
People who already have a home usually need to sell it in order to buy their next one. If a "move-up" buyer wants to buy a home during a depressed market, that means he or she usually has to sell one during the slow market, too. So you have to keep in mind that you might actually be owning (and paying off) two homes at once if the old home has trouble selling.
If a seller wants to sell his home to take advantage of a "hot" market when prices are fairly high, he or she generally has to buy the next home during that same hot market. Still, it can work to your favor, as has happened in the past few years in Pennsylvania, especially when the next home is a downsized one.
This may not be true if the people are selling in a hot market, and are planning to "relocate" to a slower market. In that case, a seller may be able to better leverage a sale for a better home in the slower market.
Basically, it tends to equal out. Currently, more than 70 percent of U.S. consumers believe a national housing bubble will burst and home prices will collapse within the next year – although 56 percent believe it's unlikely to happen in the area where they live, according to a recent survey.
Finally, the business cycle can change over time. Since 1983, we have had two fairly long expansions with only a slight recession in between each. You would not want to wait nine years to buy a home, would you? You could miss out on a substantial amount of appreciation by waiting, and end up paying much higher prices.
Andrew Lasner is Realtor and a senior real estate specialist at Keller Williams Preferred in Newtown. He can be reached at 215-860-0800 or e-mailed at: [email protected]