Timing The Market
One of the biggest considerations that people who are interested in purchasing a home must make is how much of a financial investment that they are able to make. Owning a home is a great investment as the real estate industry is one of the most stable, continuous growth industries. However, buying a home also means making the considerable investment to pay for closing costs and a down payment as well as having to make regular mortgage payments to your loan source. Consequently, it is imperative for any interested homebuyer to learn more about the real estate market and find ways that they can take advantage of market conditions to purchase a home for a good price.
Predict The Market
This strategy is called timing the market, which is a business principle describing a strategy to predict future market directions by analyzing recent economic data and then investing based on these predictions. Also referred to as market timing, timing the market in real estate refers to trying to analyze the short-term future of local real estate market conditions.
One of the biggest influences on asking prices for homes for sale depends on the local economy. A home's market value is constantly fluid because it is largely affected by its location and consequently the value of its neighborhood. Some neighborhoods, particularly gated communities, are practically guaranteed to have high costs attached to them regardless of the state of the local economy, whereas other neighborhoods are volatile, in the sense that they can be affected heavily by both national economic changes and local economic changes.
Therefore understanding how timing the market will be highly beneficial for you during your search for homes for sale. To understand how market timing works, it is important to know some basics about how fluctuations in the economy impacts housing prices. There are essentially two extremes of economic fluctuations: expansion and recession.
A period of economic expansion is marked by these properties:
Public confidence in the state of the economy. Increase in overall output levels. Rising employment rates and reduced unemployment rates. Increases in new construction levels. Rising overall prices.
Conversely, a period of economic downturn or recession is marked by these traits:
Public insecurity with the state of the economy. Reduction in overall output rates. Rising unemployment rates and decreasing employment levels. Reduction in new construction levels. Prices may rise but not at the same rate as it would during a time of economic expansion.
Economic Expansion
Now that you know the two extremes of fluctuations in the economy, you will probably be interested in understanding how these polarities affect your search for a home to purchase. During a period of economic expansion, supply and demand shifts to a position where home prices are advantageous for the home seller. Usually a period of economic expansion means that the real estate market becomes a seller's market. A seller's market essentially means that there is a higher demand for homes than there is a supply of homes for sale. Economic expansion means that most homeowners are in a position of financial security and will not want to sell their home out of financial desperation, as the value of their home will naturally appreciate during this time.
In addition to the changing motivations of homeowners caused by economic expansion, a period of economic expansion is also marked by a higher number of prospective homebuyers. This is because faith in the economy means that individuals are more willing to make financial investments in homes. As a result of this, a time of economic expansion may not be the best time to purchase a home. Due to high demand and low supply, buying a home during this type of economic climate generally results in you spending more money to buy a home than in any other time. An example of this is how prices rose dramatically in the Silicon Valley of California during the 1990's dot com boom. Propelled by local computer technology businesses, real estate prices rose dramatically as people flocked to this area to gain entrance into this booming industry.
Economic Recession
The flip side to an economic expansion is an economic downturn, which at its worst can be classified as an economic recession. During a period of an economic downturn, the supply and demand conditions favor prospective homebuyers. This is because an economic downturn is marked by job insecurity and increases in unemployment rates. Many homeowners find themselves forced in a situation where they must seriously consider selling their home before its value fully appreciates due to an inability to fulfill the financial obligations that come with owning a home (ie. mortgage payments, property taxes). Additionally, many prospective homebuyers are less willing to purchase a home during a time of economic recession due to the considerable investment required to purchase a home.
Financial flexibility is the maxim that most individuals believe in during a time of economic downturn, which makes it the best time for a prospective homebuyer to purchase a home. Considering that there is a high supply of homes available for sale and that there is a low amount of competing prospective homebuyers, a time of economic recession is the period in which a homebuyer will be able to purchase a home for a price advantageous to them. This is because an economic downturn reshapes local real estate market conditions to the point where it is a buyer's market. With the availability of a number of homes for sale and a dearth in interested buyers, it is possible for a homebuyer to play different home sellers off each other in an attempt to gain the most favorable terms possible.
Business Cycles Affect The Market
With this knowledge of how business cycles and economic fluctuations affect the local real estate market, it is in the best interest of a prospective homebuyer to know how to time the market. There are a large number of economic data that a person is able to look at. For example, it is recommended that you look at where the local economy is headed. If the local economy is starting to decline, it is a strong sign that housing prices will also drop. This can be caused a number of reasons such as the loss of major industry in that area.
Another factor to look at when timing the market is to examine how the national economic climate will impact interest rates. Interest rates are set by the Federal Reserve, which manipulates interest rates in order to bring some stability to the national economic trends by manipulating the supply of money in the market. For example, if the country is in the midst of an economic downturn, the Federal Reserve will lower interest rates to provide an incentive for people and businesses to borrow money for larger investments. However, in instances where the economy is in a state of expansion, the Federal Reserve will increase interest rates to deter inflation.
Interest rates impact mortgage rates, which are the most important financial obligation that a homeowner has to fulfill. Mortgage rates will impact the amount of money you pay back to your lender for their help in purchasing a home and the interest that your lender has imposed in order to make money out of their investment in you. High mortgage rates usually occur during periods of economic expansion and the presence of high mortgage rates may deter some prospective homebuyers from purchasing a home. Low mortgage rates occur during periods of economic recession, as the Federal Reserve is devoted to providing incentives to the public to invest in the national economy.
With these various factors involved in timing the market, it is important to reiterate that timing the market should not become a compulsion. If you find the home of your dreams for a reasonable price, you should purchase the home instead of waiting for a better time to purchase that home. This is because finding a home that you love can be difficult and no matter how much of a buyer's market you find yourself in, a great home will always be in demand and easily sold.
Additionally, another major problem with timing the market is that it is impossible to accurately predict the future. Although economic fluctuations are often called business cycles, it really is impossible to predict what is driving the economy. Also, the best market condition to purchase a home is also the time when most people are least able to purchase a home. It would be foolish to make a commitment to buy a home at a time when you lack the financial flexibility to make this investment. It is important to note that although knowing what the market conditions are in your local real estate market is essential, it is not worth the risk of jeopardizing your fiscal status to run after a deal, even if that deal is great.
