Supply And Demand
One of the most important issues that prospective homebuyers should be aware of while looking to purchase a home is their area's local real estate market condition. By understanding the different economic trends that a real estate market can be at, the prospective homebuyer will be able to buy a home for a price that is advantageous to them. Although business cycles affect the purchase of a home in a number of ways, one of the biggest influences on a home's price is the supply and demand in the local real estate market.
Supply and demand is a basic economic principal in which a product's price is either positively or negatively affected by the availability of the product. Consequently, if there is a high demand for a product that is in low supply, the price of this product will escalate due to market conditions that will support a higher price. However, if there is low demand for a product that is in high supply, the price of this product will decrease due to market conditions that are influenced by the high availability of this product.
Buying A Home
By applying this principal of supply and demand to buying a home, it is easy to see how buying a home during a time of high home availability as well as low demand will mean that you will be able to buy a home for a lower price. This is particularly true when comparing asking prices of homes to a time where local real estate market conditions have low supply of homes for sale but high demand of people who want to live in this area. The different points of supply and demand in an area will have a great influence on the asking price of homes for sale. They will also affect a variety of other important financial aspects to buying and owning a home.
There are a number of ways that supply and demand changes in a given area. Although the real estate market is considered to be one of the most stable industries in the United States of America with a strong growth tendency, as evident in the fact that housing prices have never declined nationally in a single year since World War II, there are certain events that will influence the supply and demand in local real estate markets.
Recession
National financial trends have an important influence on local real estate market conditions. During times of economic recession, supply and demand conditions will generally improve from the point of view of a prospective homebuyer. Although local real estate markets will respond differently from each other to a national economic downturn, generally what will occur is that real estate market conditions will have a higher supply of homes available for sale than there is buyer demand. This is because a time of economic recession is also a time of job instability. Unemployment rates rise during these periods and there are a number of homebuyers who are forced to sell their home due to their inability to fulfill the numerous financial obligations that come with buying a home. For example, annual mortgage payments and property taxes may become too much of a burden for a homeowner who sees a window of opportunity in selling their home to acquire some much needed capital.
While economic recessions will force many homeowners to sell their homes for financial reasons, these economic conditions also deter prospective homebuyers from buying a home. This is because this period of shaky job security will convince many prospective homebuyers that they should not take on the considerable financial investment required to purchase a home. Therefore, during an economic downturn, generally supply and conditions are favorable for prospective homebuyers to purchase a home for a price that is lower than one they would have to pay for when supply and demand conditions are advantageous to the home seller.
However, it is important to reiterate that a national economic downturn will influence local real estate markets differently. How much effect that the state of the national economy will influence local markets will completely depend on the nature of the area that you are looking to buy a home in. This is evident in the case of the Hartford, Connecticut real estate market in the late 1980s. After experience a spike in home prices from 1984 to 1988 in which average home prices escalated from $87,400 to $167,600; the Hartford real estate market experienced a dramatic fall. Although the national economy was declining in the late 1980's, Hartford's local economy was particularly hard-hit, as their insurance industry started to either lay off their workers or relocate to different areas of the country. As a result of this major industry changing within the city, Hartford's real estate prices dropped dramatically. This was because local business conditions were so bad that the city experienced zero population growth. The loss of prospective homebuyers who are from different parts of the country in addition to the increasing number of homeowners selling their homes to cope with the loss of job security meant that Hartford experienced local real estate market conditions in which there was large supply but little demand. Therefore, home prices in Hartford during this time were dramatically lower than Boston, another New England city, at this point in time. This is because Boston, although affected by the national economic downturn, did not experience the loss of a major industry and therefore did not undergo the same market conditions that Hartford experienced.
Expansion
The flipside to an economic recession is an economic expansion. During periods of national economic expansion, local supply and real estate market conditions will favor home sellers. This is because a period of economic expansion is marked by high employment rates, higher new construction rates, and general good faith in the state of the economy. Therefore, during a period of economic expansion, generally local real estate markets will be marked by low supply and high demand. This is caused by the renewed sense of job security. Many homeowners are content with their homes and will want to retain their homes in order to reap the economic benefits of their home's increasing appreciation value. In addition to how job security impacts the low supply of available homes during a time of economic expansion, it is also what drives higher demand for homes. This is because people are more willing to be adventurous with their money and make substantial commitments to achieving such dreams as owning a home. With a good faith that the national economy will continue to expand, many prospective homebuyers find that this is the best time to purchase a home. As a result of the effect that supply and demand has on local real estate market conditions, a prospective homebuyer should not expect to purchase a home for a price that is advantageous to them. Considering the number of interested homebuyers available, home sellers are able to be more rigid about fiscal demands.
Similar to how national economic downturns have varying effects on local real estate market conditions, periods of economic expansion also will vary from city to city (and even within different areas of a city) in terms of its effect on local real estate market conditions. For example, during the mid-1980s to the mid-1990s, the Hawaiian real estate market conditions increased substantially. Although the economic resurgence of the early 1990s were a major factor for this surge in housing prices in Honolulu, Hawaii, that city's real estate market was much more positively impacted than Delaware City, Delaware. The reason why economic expansion affected the Honolulu real estate market more substantially than most other cities in the country was because the Japanese economy was also doing particularly well in this time. Japanese real-estate investment in Hawaii was a major reason for this price surge and Japanese real-estate investment was much more substantial in the state of Hawaii than in any other state in the country during this period.
Each Area
Consequently, supply and demand is affected to a great degree by the state of the national economy. However, more important to the state of a local area's supply and demand is the economic makeup of the area. Certain neighborhoods, particularly wealthy and prestigious areas of specific cities, will consistently have high demand and little supply, which will drive up the prices for that area. However, other neighborhoods and cities, such as Flint, Michigan, are struggling with their local economy and consequently even a high national expansion will not positively affect their real estate market conditions to the same extent as it effects other areas in the country.
Besides impacting the asking prices of homes for sale, supply and demand issues will affect a home's appreciation value. One of the reasons why people want to buy homes is because homes are a strong long-term financial investment. As national housing prices have never annually dropped since the end of World War Two, homeownership means owning a considerable economic investment for the future. However, in periods of time when there is a high supply of homes but low demand by prospective homebuyers, than home sale prices will fall, as will the overall appreciation of homes. Such trends were evident in the early 1980s and also in the early to mid 1990s.
However, it is highly recommended that prospective homebuyers purchase a home when there is a high supply of homes available for sale with little demand. This is because such a supply and demand ratio will ensure that the homebuyer will be able to purchase a home for a price that is completely advantageous to them. Considering that fluctuations in the economy are now a fact of life and that the nation's economy will shift from economic downturns to economic expansion, a homebuyer by purchasing a home during a slow housing period will be able to be reasonably certain that the national economy will show signs of strength again. Therefore, the home's value will rise again and the homebuyer would have made a great business deal.
However, if you already own a home and need to sell that home before purchasing a new one, supply and demand trends will have little impact on your decision. Although purchasing a home during a time when there is high supply but low demand is always beneficial for a homebuyer, selling a home during those same conditions is difficult. At best, these two opposite trends will balance each other out. However, there are instances where these homebuyers end up selling their home for considerably less than the savings that they attain from purchasing a home.
