Real Estate Reality: The Rise and Fall of the Housing Market

Real Estate Reality
Real estate reality is a bit like the physical truth of gravity. Real estate prices rise and fall according to a variety of factors, including sales supply or demand and access to mortgage loans. Within housing market context, supply indicates the total amount of properties available in the market at various price points. Demand is the total amount of would-be purchasers of these properties.

If demand for real estate increases and there are more buyers than sellers of property, prices will rise. If more sellers of real estate exist than there are purchasers of these properties, then prices fall. Fluctuation in these levels of housing supply and demand can result in a housing market boom or a housing market bust.

Housing Market Economics

According to economic theory, a large supply of anything implies that prices will decline. If there are more properties for sale than buyers with the money to buy them, sellers react by reducing prices to entice buyers.

Oversupply of properties indicates a buyer’s market. A buyer with cash in hand or a pre-approved mortgage loan will have his or her choice of properties. He or she might be able to negotiate a better purchase price with the seller in exchange for sale of the property.

In comparison, if there are fewer properties than there are buyers, then buyers must compete for this limited supply. In a hot seller’s market, buyers make quick decisions and frequently agree to the seller’s asking price. In some cases, bidding for a desirable property may cause some buyers to pay more than the asking price. In this environment, housing prices will rise.

Change of Supply

An ideal housing market is one in which buyer and seller demand is perfectly balanced. In such a housing market, prices are relatively stable and gradually rise over a period of time. Since the number of homes in the US is seldom constant, the available supply of residential real estate changes. Factors such as new construction, renovations, demolitions, disasters, or conversions affect available housing stock.

Planning policy and other regulatory factors affect housing inventory. Such regulation restricts building in some areas and encourages it in others. Regulatory fluctuations can affect supply of residential properties at local, regional, and national levels.

Change of Buyer Demand

Buyer demand is an important factor in rising or falling real estate prices. The neighborhood or town’s population can affect buyer demand. If the area population grows but housing supply does not keep pace, home prices rise. For instance, if a large employer builds a plant in the area, new jobs will increase the amount of money that home buyers have to spend. If new construction does not occur in tandem, buyers will be forced to compete for a dwindling supply and home prices will increase.

Of course, home purchase is affected by the home seeker’s buying power. If he or she does not have easy access to a mortgage loan, buying a new home will be challenging.

Access to mortgage money is an important factor in rising or falling housing prices. In a buoyant economy, home prices rise because many people have access to a reasonably priced mortgage. Conversely, high unemployment rates and declining salary levels in the community signal a troubled economy. In such an environment, bankers are likely to restrict the number of new mortgage loans they underwrite.

Inflation also affects home prices. In an inflationary environment—one in which inflation is increasing faster than buyers’ levels of disposable income—housing prices are likely to fall.

Housing Bubbles or Crashes

In a rising economy in which salary and wages are high and rising, new buyers become interested to the housing market. Housing supply levels dwindle as buyers purchase them. An under-supply of available homes boosts real estate prices.

Existing homeowners frequently decide to cash out when a housing boom causes prices to rise. The decision to sell their home may be prompted by the decision to retire in a less expensive market or downsize by purchasing a smaller home.

Of course, real estate developers will respond to the opportunity to make profits and build new construction in a rising housing market. Balance of supply and demand is important, because if new construction exceeds market appetite, an oversupply of homes will result. Residential prices will then start to fall.

Purchasing a home during a housing bubble can cause some buyers to overstretch available finances. Homes bought in a housing boom can cause these buyers big financial headaches. If home prices fall steeply over a short period in a housing crash, these buyers might find themselves holding underwater mortgages. That is, they are now committed to pay mortgage principal and interest that is higher than home value.

Real estate buyers must understand the property value cycles occur in cycles. According to Harvard University, property value cycles occur every 18 years or so.

Governmental Reaction

The U.S. Federal Reserve Bank oversees the national economy. The Fed regulates money flows by controlling current interest rates. Since rising interest rates ultimately affect the buyer’s costs of owning a home, mortgage loan rates effectively stimulate or cool off the housing market.

Lower mortgage loan rates increase home buying demand and cause rising real estate prices. In a weak economy, the Fed plays a role in stimulating the housing market. When homeownership is affordable, buyers enter the market. Loan programs, such as USDA mortgages or FHA-insured loans, encourage new home buyers to shore up a weak housing market. This action in turn boosts the demand for homes and helps to stabilize or increase property values.

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