I believe there’ s a couple reasons for where we are at with the housing market today. First, low inventory. For the past couple years we have experienced normal seasonal declines in inventory.
This is usually attributed to weather and the holidays. This year we did not see that. Which means there were less houses for buyers to choose from.
Low supply = high prices. Another reason for why we are where we are at comes down to interest rates and consumer behaviour.
Over the last couple years we have had historically low interest rates.
When rates are low, consumers tend to borrow more money. When consumers can borrow more money, they will take out loans to purchase homes if they are able to. The government has also put programs in place that make it easy for first time homebuyers to purchase a home.
Overall confidence levels have increased with consumers which allows them to take advantage of lower mortgage rates. When consumers can take advantage of low mortgage rates, they are more likely to buy a home if they are financially capable. Low inventory + stimulated consumer spending = increase in demand.
When demand increases, prices rise. I believe most economists agree that the reason for the recent behaviour in the housing market comes down to supply and demand. There has been a decrease in housing inventory which caused an increase in price.
However, many experts think that as we get past winter, we will start to see more inventory come available. More people will list their houses which will help prices stabilize or possibly even decline. Some experts think that we will continue to experience low inventory.
They believe that construction has not kept up with the growth of our population. Another reason some experts think there will continue to be less inventory available is because of the amount of foreclosures we have experienced in the recent past. While these foreclosed homes have increased the inventory of homes for sale, they have not been absorbed into the market as fast as newer construction would be.
Foreclosed homes can take anywhere from 6-12 months to sell. The longer it takes for these homes to sell, the longer it will take for the housing market to get back to normal. Supply and demand will play a factor in where the market is headed.
But there are many other factors that influence the market we call housing. One of those factors is the economy. Our economy plays a major role in the housing market.
When the economy is doing well, people have jobs and feel confident. When people have jobs and confidence, they have disposable income. When people have disposable income, they are able to buy houses.
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When the economy is not doing well, people tend to lose their jobs and spend less. If people are losing their jobs, they aren’ t going to be able to buy a home. When this happens, the demand for housing will decline, as will the price.
Right now, our economy has been experiencing slow growth. But it’ s still growth, which means our economy is healthy. Because our economy hasn’ t been growing very quickly, neither has the housing market.
Sales and housing starts have been down for the last couple years. However, we are starting to see signs of improvement in our economy. We have seen the unemployment rate go down and job growth go up.
If this trend continues, we will see more demand for housing which will increase prices. Interest rates play a factor in the housing market as well. For years, the Federal Reserve has raised and lowered interest rates to maintain inflation.
When inflation is high, the Federal Reserve raises interest rates. When interest rates rise, it costs more to borrow money. When it costs more to borrow money, people don’ t borrow money to buy homes.
When the Fed lowers interest rates, it makes it cheaper to borrow money. The Fed has kept interest rates at historical lows over the last couple years. This has led to a surge of people buying homes.
Since more people are able to afford to buy homes, they are buying them. Demand has soared over the last couple of years. Demand is increasing so rapidly prices are being pushed up.
If the Fed were to raise interest rates, it would hurt the housing market. If interest rates rise, it will be harder for people to afford to buy a home. There will no longer be a boom of people trying to purchase homes like we are seeing now.
If that were to happen, demand would decrease and so would prices.
The last reason I think the housing market is where it’ s at today is because of consumer behaviour. Consumers do not always jump into the housing market at the same time.
A lot of millenials rent for a few years before they buy. Many older consumers will sell the home they are in and move to a new location. We are experiencing a year where it seems like everyone is jumping into the housing market.
We have had low inventory for the past few years because more people have been buying homes. Millenials are deciding to buy homes instead of rent. The large group of millenials that are buying houses are causing an increase in demand.
The older generation has been selling at a much higher rate too. Though the rate has slowed, we had so many people selling that it helped ease the market. Consumer behaviour has had a positive effect on the market.
