Maybe You Shouldn't Wait
One of the biggest considerations that a homebuyer must analyze is the financial aspect to purchasing a home. Although homeownership is one of the most stable and safe investments that any individual can make, it is still a decision that requires much thought. This is because the financial benefits to owning a home is a long-term proposition based on how much property rates appreciates over a span of time. In addition to the long-term benefits to homeownership is the fact that buying a home requires a substantial short-term financial cost. Buying a home is never cheap and most people will have to spend a significant part of the savings to pay for the down payment and closing costs, the only fees that the homebuyer cannot use a home loan to pay for. In addition to these upfront costs, the homebuyer will have to pay off their mortgage loans to their lender, who provided the necessary amount to finalize the home purchase.
With these financial considerations in mind, it is understandable why many prospective homebuyers take their time to buy a home when it is in their best financial interests. Although the average national sale price of a home has never dropped through the years since the end of World War Two, local real estate prices do vary. This is because there are many fiscal issues that can drastically shape real estate prices. The biggest consideration is how business cycles or economic fluctuations, which is a more accurate term to describe economic trends that are impossible to accurately predict, affects your purchase of a home.
Effects Of Business Cycles
Business cycles can impact real estate prices in a number of different ways. There are two extremes of business cycles: economic expansion and economic downturn or recession. An economic expansion refers to a time where the economy and people's faith in the economy are strong. Marked by rising employment, overall output, and new construction rates, an economic expansion is a time marked by strong job security. Consequently, the real estate market generally shifts into being a seller's market. Due to a lack of homeowners selling their homes because they want to reach the financial capabilities of owning a home by letting it fully appreciate; prospective homebuyers are forced to look at a limited amount of homes available for sale. Additionally, the amount of prospective homebuyers increases as more people have the financial flexibility to make the considerable investment to purchase a home. Therefore, the general asking prices for home will increase so that home sellers can capitalize on a supply and demand ratio that is advantageous to them.
Conversely, an economic downturn is a period that is marked by rising unemployment rates and reduced overall output levels and new construction levels. A time where many people are worrying about their job security, an economic downturn can evolve into a recession, a time where people have little faith in the economy. Due to the job insecurity that most people will face during an economic downturn, most individuals are more fiscally conservative in an attempt to increase their financial flexibility. Although this may seem like a horrible time to purchase a home, the real estate market during an economic downturn actually usually changes into a buyer's market. This is because many homeowners are forced to sell their homes before their value fully appreciates due to an inability to fulfill the financial obligations of homeownership. Job losses often turn into job changes that require relocation to other parts of the country. Regardless of the individual circumstances, many homeowners are willing to abandon the long-term investment of homeownership and sell their homes. In addition to this, there is a lower level of prospective homebuyers willing to purchase a home during an economic downturn. Due to increased worry about the state of the economy, most individuals will decrease their financial burdens. This includes not purchasing a home. Consequently, an economic downturn will affect sale prices of homes for sale that will be advantageous for the homebuyer.
Mortgage Rates
In addition to the way that business cycles affect asking prices of homes, business cycles also affect mortgage rates for homeowners. This is caused inadvertently by the relationship between mortgage rates and interest rates. Controlled by the Federal Reserve, changes in the level of interest rates are done as a way to manage business cycles. During a time of economic expansion, the Federal Reserve will increase interest rates as a way to reduce the possibility of inflation caused by a robust seller's market. As a result of this increase, available mortgage rates will increase in this time adding to the financial burden of homebuyers at this point. However, during a time of economic downturn, the Federal Reserve will decrease interest rates in order to provide incentives to businesses and individuals to purchase money and invest in the economy by making large purchases. As a result of this decrease, available mortgage will decrease adding to the savings that homebuyers will have.
Therefore, the best-case scenario for a prospective homebuyer is to purchase a home during an economic downturn where the asking prices for homes for sale are lower and mortgage rate levels are also at a low. A tactic known as timing the market, many homebuyers base their decisions on purchasing a home on the business cycle that they find themselves in. However, there are many scenarios in which maybe you shouldn't wait for the real estate market to become advantageous for you to purchase a home.
Example
Take the example of Leonidas Howden, a Cyprian-Brit immigrant who lived in upstate New York. After several years working as a successful accountant in Albany, Leonidas Howden or Leo, found that he had saved enough money to purchase a home in Buffalo. However, he made this realization at a time when the economy was in a period of economic expansion. Deciding to wait to a time where prices would become more advantageous to him, Leo continued to live in his Albany apartment accumulating more capital. Eleven months later, Leo realized that the economy was now in a downturn but by then he had saved enough money to purchase a loft in Manhattan, a city that he had dreamed about living ever since he was a college student in London. However, Leo also recognized that although the national economy was in a downturn that generally affected real estate prices internationally that Manhattan real estate prices were still high due to some ambitious construction projects occurring at that time. As a result, Leo decided to wait some more in order to perfectly time the market to fully save his money. Leo was a smart guy but in this case he was: too smart. The Manhattan local real estate market continued to boom and Leo continued to wait until prices were advantageous. However, after three years of waiting, Leo decided that the time had come to just purchase a home. He did purchase a loft but for significantly more than what he could have paid for it years earlier.
It is stories like Leo that show that it is important to be aware of how to time the real estate market to your advantage but it should not be a source of obsession. This is because timing the market is a difficult proposition and maybe you shouldn't wait to purchase a home if that is your one objection. It is impossible to accurately predict the future and particularly how the economy will change. Economic fluctuations can be caused by a variety of factors and also national economic fluctuations will affect cities differently and even different parts of cities in a different manner. Consequently, there is not enough financial data available to accurately predict market changes so you should not obsessively wait for a time where you think the market will change.
Additionally, the term business cycle is an inaccurate way to describe economic fluctuations. Business cycle conjures up images of timed periods that can be predicted that mark economic changes, which unfortunately it is not. It is impossible to know certainly the length of time a business cycle will last. For example, the last two decades have been marked by two fairly long periods of economic expansion with only a short economic recession that separated the two periods. As a result of waiting to purchase a home during an economic expansion, it is possible that you lose money when you do finally purchase a home because you missed out on a substantial amount of appreciation by waiting.
Reasons Not To Wait
In addition to these considerations of why maybe you shouldn't wait to purchase a home because of real estate market conditions are practical reasons why timing the market may not be the most important aspect to purchasing a home. The most practical reason is that many homebuyers find it impossible to be in a position to purchase a home when market conditions favor them. This is because a period of economic downturn, or worse, economic recession will affect them in a negative way. A time of job insecurity is a time when you should never purchase a home, regardless of how good a deal you are faced with. Therefore, many prospective homebuyers are forced to prioritize fiscal responsibility and flexibility during an economic downturn over a good deal to purchase a home. Buying a home is a gigantic investment that should not be completely determined by economics.
Another reason why maybe you shouldn't wait to purchase a home because you are dedicated to timing the market is that this entire economic strategy is only really effective for first-time homebuyers. Unless you are purchasing homes for strictly business reasons, in which timing the market will be the best strategy to employ, upgrading to a new home because of a good deal during an economic downturn makes little sense for homeowners. This is because how good the savings you will find by purchasing a home in a buyer's market will be counterbalanced by how much money you will likely lose by selling your home in a buyer's market. There is a definite yin and yang factor in how business cycles will either greatly favor homebuyers and home sellers, so trying to time the market as a person who has to both buy and sell a home will usually make little difference to you. This is because these things tend to balance each other out.
