How Does the Housing Market Work?

Jessica Gomez
Mortgage concept

When discussing a country's economic condition, economists will usually point to the real estate market. The real estate market where homes are bought and sold, also known as the housing market, is a big indicator of whether an economy is booming or failing.

Factors Impacting the Housing Market

A housing market can be categorized by city, state, county or country, and conditions will vary dependent on geographical factors. For example, the housing market may be strong overall in Wayne County, Michigan, but it may be weak in the city of Detroit. Several factors play into how strong the housing market is at any given time.

Economy

A strong economy produces a strong housing market. When people are spending a lot of money as consumers, that usually means that they are in a better position to purchase real estate.

The more people that are buying houses, the more demand is created, and property values begin to rise. Conversely, with a struggling economy, more foreclosures are likely to occur, and fewer people are able to qualify for a home purchase. Properties sit on the market longer, and ultimately home values begin to plummet.

Interest Rates

Mortgage interest rates vary daily. As rates begin to rise over time, people become less likely to purchase property. Some want to wait until rates come down, and others cannot afford a mortgage payment with high interest. When rates go up significantly, the housing market can come to a screeching halt until they begin to fall again.

If you're purchasing a property and have been quoted a low interest rate, ask your mortgage lender to lock in the rate so it does not change while your loan is in the process of underwriting (where the loan is assessed and qualified).

Demographics

Age, family status, and income all help to determine property value in a specific region. A city with award-winning schools is attractive to families; an area with an elderly demographic may have a lot of home sales as owners pass away or move into smaller condominiums or nursing facilities. The people and the incomes of those purchasing homes in a certain area dictate the future of the neighborhood's housing market.

Buyer's Market Versus Seller's Market

You may have heard the term 'buyer's market' or 'seller's market' when someone is talking about real estate. It means exactly what it sounds like and is related to supply and demand. Because property values depend on home sales in the area, the more people pay for properties, the more home values in that area increase. When fewer people are purchasing, property values go down.

  • A buyer's market is the best climate for purchasing property, meaning that houses for sale are plentiful and property prices are kept low.
  • A seller's market is the best time to sell a property because property values are high and inventory is low. When fewer homes are for sale, buyers have less to choose from, and the demand for a particular property goes up.

It can be tough to decide when to move when you have to sell one property to buy another. Weigh the options and decide whether you'd rather sell your home for the highest possible amount or if you'd prefer to be able to buy when you have your choice of several properties in a lower price range.

For investors, buying low and selling high is the most important part of dealing in real estate.

Fluctuating Market Conditions

When you purchase a property, the property not will stay at the same value for the duration of the time you own it. The housing market fluctuates frequently, so you may see a drastic change in value by the time you're ready to sell.

Understanding the Housing Market

The housing market is an ever-changing landscape, and no housing climate ever lasts forever. Housing market trends can be tough to predict because so many factors play into its future changes, but if interest rates and unemployment start to go up, the housing market is likely to go down. It's important to stay abreast of your area's housing market strength so that you know what's happening with the value of your property. A licensed real estate agent in your area can assist you in making a wise decision regarding the best time to buy or sell.

How Does the Housing Market Work?