The Business cycle and buying a home|
The Business Cycle and Buying a
There are times when the economy is brisk and everyone feels
confident about his or her prospects for the future. As a result, they
spend money. People eat out more, buy new cars, and….
…They buy houses.
Then, for one reason or another, the economy slows down. Companies
lay off employees and consumers are more careful about where they
spend money, perhaps saving more than usual. As a result, the
economy decelerates even further. If it slows enough, we have a
During such a time, fewer people are buying homes. Even so, some
homeowners find themselves in a situation where they must sell.
Families grow beyond the capacity of the home, employees get
relocated, and some may even find themselves unable to make their
mortgage payment - perhaps because of a layoff in the family.
Supply and Demand
When the supply of available houses is greater than the supply of
buyers, appreciation may slow and prices may even fall, as happened
in the early eighties and the early to mid-nineties.
If you are lucky enough to purchase a home during a slow period, you
can be reasonably certain the economy will begin to show strength
again. At times, real estate values may even surge drastically. In many
regions of the country, this is precisely what occurred in the late
eighties and nineties.
Market Timing is Difficult
One problem with attempting to time your purchase to the business
cycle is that no one can accurately predict the future. Another
challenge is that interest rates are generally higher during a depressed
market and income may not be keeping up because less overtime is
available and bonuses or commissions are down. With higher interest
rates and lower earnings, fewer people can qualify for a home purchase
than in more prosperous times.
Why You Should Not Wait
Plus, "timing the market" generally works best for first-time buyers.
People who already have a home usually need to sell it in order to buy
their next one. If a "move-up" buyer wants to buy a home during a
depressed market, that means they usually have to sell one during the
slow market, too. If a seller wants to sell his home to take advantage of
a "hot" market when prices are fairly high, they generally have to buy
their next home during that same hot market.
It tends to equal out.
Finally, the business cycle can change over time. Since 1983, we have
had two fairly long expansions with only a slight recession in between
each. You would not want to wait nine years to buy a home, would
you? You could miss out on a substantial amount of appreciation by
waiting, and end up paying much higher prices.
copyright 2000 by Terry Light and RealEstate ABC, revised 2002