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,
andƒ.
ƒthey 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.
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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.
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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.
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