Fluctuation In Economy: Recession And Expansion
When it comes to important issues in buying a home, everybody has heard the saying: location, location, location. It is true that location is a key matter when it comes to buying a home, but an underrated aspect to buying a home is: knowing when to buy a home. By paying attention to fluctuations in the economy, prospective homebuyers will be able to take advantage of economic conditions and purchase a home for a price that is advantageous to them.
Fluctuations in economy can occur for a number of reasons that economic analysts attribute to a number of reasons. Some analysts believe that fluctuations in the economy are caused by uneven government policies whereas others believe that these same government policies are responsible for balancing fluctuations in the economy that are caused by the inherent nature of the market. Regardless of the reason, fluctuations in the economy are now a natural part of life. Political responses to these economic fluctuations are also now a part of modern life and it is possible for prospective homebuyers to take advantage of both the economic conditions and their political responses to purchase a home for a good price.
Recession And Expansion
There are two main extremes to fluctuations in economy: recession and expansion. Economic recession refers to a period of time in which the public has less faith in the economy than in normal times. This is because economic recession is marked by general trends of decreases in overall output as well as employment. New construction rates are lower while unemployment rates are higher. Economic recessions, at their worst, can result in conditions similar to the Great Depression of the 1930s.
Conversely, economic expansion refers to a period of time in which the public has great faith in the economy compared to normal times. It is a time where employment levels are high and so are new construction rates and overall output rates. Conversely, unemployment levels are low and prices of products will rise due to the positive economic conditions.
These economic fluctuations are difficult to predict and do not lost for a specific amount of time. There can be numerous factors that cause these changes in the economic conditions, which can be purely economic, political, social, technological, and whatnot.
From a homebuyer's perspective, economic recession and expansion have a number of advantages and benefits. During an economic expansion, employment rates are increasingly high and consumers are increasingly willing to take chances with their finances. Consequently, times of economic expansion are usually periods where prospective homebuyers feel confident that the positive economic conditions will continue thus allowing them to make the considerable investment needed to fulfill the down payment and closing costs component of buying a home.
As economic expansion is a time marked by high levels of home purchases, there are a number of reasons why a period of economic expansion may not be the best time to buy a home. Due to the increased amount of potential homebuyers, the real estate market conditions in times of economic expansion, has much more prospective homebuyers than they do homes available. Consequently, asking prices for homes will increase due to the rising market value of homes. Additionally, mortgage rates tend to be higher in times of economic expansion due to reactions by lenders to changes in the nation's interest rates.
The Federal Reserve control interest rate levels and interest rates tend to increase during periods of economic expansion. The reason why interest rates increase during a time of economic expansion is due to fear of inflation caused by rising prices. As mortgage rates are dependent on interest rates, mortgage rates levels are more likely to rise during a period of economic expansion. Considering that most homebuyers are unable to purchase a home outright, these high mortgage levels may not be a deterrent for prospective homebuyers to buy a home.
Recession And Housing Market
During a period of economic downturn or recession, there is a general trend of rising unemployment rates and decreasing overall output. Additionally, the rates of new construction are reduced and prices may continue to rise, although they do so at a much slower rate than during a period of economic expansion. Although this may seem like a poor time to purchase a home, it actually may be in your best financial interest to buy a home during a recession.
This is because an economic recession often changes the local real estate market conditions. Considering, the fiscal conservatism that people employ during periods of economic recession, these economic conditions produces few demands in the housing market. Additionally, the increasing levels of unemployment levels caused by a recession means that many homeowners are now put into a position where they are forced to sell their home to accommodate changing job demands. Consequently, an economic recession also produces a large number of homes that are on sale.
In addition to how an economic recession will reduce the asking prices for homes for sale, an economic recession has another positive aspect for potential homebuyers. This is due to lower mortgage rates caused by changes in interest rates. Changes in interest rate levels are made by the Federal Reserve as a way to regulate the economy. Therefore, in a period of economic downturn, the Federal Reserve tends to reduce interest rates in an attempt to revive the economy. This is because reduced interest rates are usually attractive to businesses and people who want to borrow money or refinance existing loans at a reduced level. Consequently, lower interest rates will result in lower mortgage rates, which produce monthly mortgage payments that are advantageous for homebuyers.
However, it is important to note that many prospective homebuyers are unable to purchase a home during an economic recession due to heightened fears of job security. As homeownership requires that a homebuyer has some stable form of income, many homebuyers would prefer to make the considerable investment required to buy a home in a time where economic conditions will reinforce their consumer confidence.
Additionally, for prospective homebuyers who already own a home, it is usually not in their best interests to purchase a home during an economic recession. Unless, you have the financial capabilities to purchase a home without selling your existing home, economic recessions will offer a contradiction to you. This is because you would have to sell your home before accumulating enough capital to pay for the down payment and closing costs required to purchase a home but that is not covered by a mortgage loan. Consequently, if you were to try to purchase a home during this economic downturn, you will also have to sell your home during a time where local market conditions favor homebuyers much more than they do home sellers. Therefore, it is recommended that you wait until economic levels change to the point where you will be able to sell your home for an amount of money that is suitable.
When Is Recession Good?
For individuals whose intentions for purchasing a home is based solely on the investment value, an economic recession is the best time to purchase a home. This is because market conditions favor homebuyers during an economic recession. Not only does supply and demand conditions ensures that there are far more homes available for sale than there are interested buyers, but mortgage rates will be lower in order to stimulate economic activity. Consequently, homes can be purchased for a level that is much lower than the ones presented during normal economic times or during an economic expansion.
It is important to note that fluctuations in the national economy may not result in drastic changes to local real estate market conditions. For example, the dot com bust led to drastic reductions in real estate prices in the Silicon Valley, the site of many of these businesses. However, in Pittsburgh, this change in local real estate market conditions did not apply to this mainly industrial city. Additionally, fluctuations in the economy can vary within the same city. For example, the flight to suburbia in New York City meant that real estate market conditions resulted in lower prices on homes in Brooklyn. In Manhattan, however, these real estate market conditions did not change drastically.
Therefore, it is important to study how fluctuations in the national economy affect your local economy or the local economy of the area where you want to purchase a home. By studying the market conditions of the neighborhood where the home you want to purchase is located, you may be able to purchase this home at a level that is conducive to your goals. However, it is important to note that fluctuations in the economy are nearly impossible to predict. Therefore, it is recommended that you do not become overly obsessed with economic trends. If you find a home that you want to purchase in a neighborhood that you enjoy for an appropriate price that you are able to afford, do not wait for economic conditions to change the asking price of this home. Just fulfill your original goal of buying a home and you will be much more happier for it.
