Real Estate Markets Are Cyclical
If we learn from the past meaningfully, we will better understand what the history of real estate should teach us. The housing markets are often cyclical. There are up-markets and down ones and periods with more excellent balance between these two. Most have heard references to buyers’ and sellers’ markets, yet people seem to overreact to changing conditions. It would, therefore, be beneficial to understand some of the reasons better and the driving forces involved in what makes these cycles occur. With that in mind, this article will attempt to briefly consider, examine, review, and discuss five critical factors and some potential impacts and ramifications.
1. Interest rates: One of the driving forces in the housing market is interest rates. These may be market-driven, based on economic conditions, manipulated (for political purposes, etc.), or specific to mortgage rates. After all, when one pays lower rates for a mortgage, we generally witness greater buyer demand because it’s possible to get more bang for the buck. Lower speeds mean one can buy more houses for his dollars because the costs of his monthly carrying charges are reduced. However, throughout history, these have lowered and raised, and often, dramatically impact the overall industry.
2. Overall economy: A good economy brings greater confidence because people believe it’s an excellent buying time. On the other hand, when there is an economic concern, it affects the real estate industry negatively.
3. Consumer/ job confidence: The better the overall job security and consumer confidence, the better the housing market responds. On the other hand, many people are cautious and concerned during either actual or perceived downturns or even potential ones and take a break from looking for a house. The laws of supply and demand will either raise or lower prices when sellers or buyers are in a larger pool.
4. Pricing/ affordability: There’s often a point of diminishing return regarding rising prices. When these grow too quickly (or are perceived as houses costing too much), many people perceive them as unaffordable and stay away from the housing market. That will bring about a price correction.
5. Real estate taxes: Areas with higher real estate taxes often have the most significant market swings because, especially since the tax legislation enacted in 2017, which capped deductions to $10,000, these houses have become more challenging to market and sell.
The more you understand and learn from the past, the better you will be prepared for future fluctuations. Will you become a smart home buyer?