The Business Cycle and Buying a Home
Recession and Expansion
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 new homes.
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 recession.
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.
Should You Try to "Time the Market"?
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. For that reason, fewer people can qualify for a home
purchase than in more prosperous times.
Why You Should Not Wait
Plus, this strategy 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.
|
