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The Business Cycle and
Buying a Home
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 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.
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.
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