8 Things to Understand About the Ups and Downs of the Housing Market

8 Things to Understand About the Ups and Downs of the Housing Market

It’s a great year for homeowners looking to sell. However, rising inflation and high prices promise to make things more challenging for buyers.

With the different types of housing markets and the pandemic-related housing shortage creating a buying frenzy, many people with various financial situations want to determine the best time to buy a home.

Are you looking to buy or sell a home? Here are 8 important ways to understand and ride out the ups and downs of the housing market.

1.    How does the housing market work?

The housing market typically refers to the real estate market. This is an economic space where people buy and sell homes. Whether house prices go up or down determines whether the economy is thriving or failing. 

The housing market is constantly changing, influenced by the economy, inflation, buyer, and seller conditions.  

You can look for housing markets in different parts of the country, state, county, or city.

An important thing to consider is that housing market conditions and prices can vary widely depending on the area.

For instance, Wayne County, Michigan, might experience a housing boom. Meanwhile, Detroit might see housing values fall.

2.    Why is the housing market so hot?

Currently, the American housing market is overheating. House prices increased an average of 15.8% this past year across the nation.

Even just a few years ago, getting approved for a mortgage was usually the most challenging part of buying a home.

Today, despite tightening restrictions on home loan approval, that’s the last thing that buyers worry about.

Now, single-family homes in most U.S. cities sell at a premium. As a result, houses sell like hot cakes in intense bidding wars—the buyer who races in with the most cash and closes the contract the fastest wins.

Home inventory – how many houses are on the market – has reached record lows. As a result, most houses no longer sit on the market for weeks, months, or years. Instead, most pop up on the market and go under contract within hours.

Demand, housing shortages, and technological advances have fueled this buying frenzy. Couple things to know about the current environment:

  • Online listings, digital mortgage approvals, and virtual closing procedures have revolutionized the housing market, cranking up the speed at which houses go on the market and sell.
  • But unfortunately, the ability to view, get approved, and close on a house with just a few clicks means that technology has artificially turned up the heat and caused housing demands to outstrip property supply.
  • Post-pandemic concerns and a fresh crop of Millennials and Gen Zers starting families and entering the housing market to buy into the American Dream constitute some of the social factors driving the housing boom.
  • In addition, many home buyers are prioritizing space, low-intensity areas, and privacy, which often means moving further away from urban centers.
  • According to the National Association of Realtors, if you’re looking in super popular places like Miami, these regions are already experiencing a housing boom. However, even in regions further out, like Nashville, Boise, and Sacramento, panicked buyers, are waiving contractual norms such as all contingencies in a desperate scramble to get ahead of other buyers before the housing boom dies down.
  • If you’re heading for less popular regions or properties further from urban or suburban cores, you’ll likely have a better chance of beating out the competition to obtain your dream home.

Based on the past, some experts argue the last time that the housing market looked this hot, signaling a possible boom and bust in the future, was just before the Great Recession.

Other experts say that the fundamentals of the housing market are strong and will stay the same even if the market seems to be going crazy.

3.    What is a housing bubble?

When real estate can’t appreciate each year at a fast and risky pace, this can cause a housing bubble. Conversely, periods of high demand, low housing supply, and high inflation can create housing bubbles that burst like the crash in 2008.  

Housing bubbles emerge from complex factors such as booming economic prosperity, low-interest rates, broadly available mortgage offerings, and loose lending that gives easy access to credit.  

The combination of wild speculation, risky investments, government support and influx of money into housing markets, a downturn that resulted in mortgage defaults, and over-valued home prices creates a sustained but temporary bubble that bursts when the economy and consumers can no longer sustain inflated prices and payments.

A significant difference between the 2008 housing bubble and the recession crisis lay in easy credit, not the cheap options many mortgage lenders offer for approved buyers.

Factors that impact the housing market  

Overall, three key factors consistently impact the housing market: home values, prices, and demand.

4.    Economy

It’s no surprise that the economy plays a significant role in whether the housing market is up or down.

If the economy is strong, it will produce a strong housing market. When economic stability and prosperity are present, consumers tend to spend more money. If cash flow and spending are high, this usually indicates that people are in a better financial situation and can afford to buy real estate.

A second factor involved in the housing market’s economy revolves around demand.

During the early pandemic, people generally hunkered down and spent less. Currently, with the U. S. economy expected to grow by 3.9% in 2022 and people scrambling to buy homes, the housing market is expanding rapidly.  

If more people buy houses, housing demand will rise, and property values will increase.  

When the economy struggles, fewer people qualify to purchase a home. As a result, properties sit on the market for months or years, causing home values to plunge. Foreclosures occur when people can’t make their mortgage payments.

5.    Interest rates

When talking about the housing market, it’s hard not to ignore interest rates. Interest rates vary daily and impact the housing market’s strength or volatility.

For example, many houses sell at a 9.9% interest rate over the seller’s asking price.

Soaring interest rates have the power to stop the housing market in its tracks. In the post-pandemic economy, reduced interest rates offset the rise in sales prices.

When interest rates rise for a sustained period, consumers are less likely to buy real estate. As a result, some people wait it out to see if interest rates decrease in hopes of paying a lower rate. Others can’t afford a high-interest mortgage and need to wait until interest rates go down before they can buy property.

If you want to purchase a house and receive a low-interest rate quote, check with your mortgage lender to lock in your rate. That way, your quoted rate won’t change while your loan goes through the underwriting process. During this time, your loan is assessed and qualified.

6.    Demographics

The third factor that impacts the housing market revolves around demographics.

This means that age, family status, and income influence different regions’ property values.

For instance, if a city has top-notch schools, houses in that area are more appealing to families. A Florida beach town with an older demographic might have a higher house sale turnover when elderly owners pass away, downsize to smaller condos, or move into nursing homes.

Demographics play an often-overlooked role in the housing market since the type, and income level of potential buyers that come into a specific area determine the neighborhood’s housing market future.

7.    A buyer’s market vs. a seller’s market

You’ve probably heard the phrase that it’s either a buyer’s or seller’s market when someone refers to real estate.

The phrase refers to the law of supply and demand. Home values are dependent on how much other houses sell for in the neighborhood. The more people pay for properties in the area, the more home values will increase. If sales are fewer and lower, property values drop.

Here are two key things to keep in mind when understanding the buyer’s versus seller’s market aspect of the housing scene:

  • Your best time to buy a house is when it’s a buyer’s market. Watch out for lots of sales and low property prices.
  • Watch out for a seller’s market symptoms if you’re looking to purchase a home. Property values will remain high while choices are fewer. With fewer houses for sale, buyers have fewer options to choose from when they buy. As a result, housing demand and prices will increase.

8.    How to decide when to buy

It’s hard to decide to buy a house and move when you need to sell your house before buying another.

If you have enough money to buy another house outright or put down a 20% down payment to secure the best mortgage rates while waiting on your own home to sell, this will significantly free up your purchase options.

If you’re investing in a property, the most critical decision is whether to buy low or sell high.

It’s a good idea to keep up with the housing market trends in your area or the area in which you intend to buy. Getting in touch with a local real estate agent will help you get the latest updates and stay on the cutting edge of the real estate market.  

While it’s difficult to predict precisely how the housing market economy will go, you’ll remain aware of the fluctuations in home values and sale prices.

Ultimately, you will want to decide if you prefer to sell your house for the maximum amount you can get or if you want to have the freedom to buy a home when you have a range of options available when prices are lower.

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