Understanding the impact of local market conditions on home prices
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Buying and selling a home is one of the most significant transactions a person will make in their lifetime. With homes consistently increasing in value over time, they’re considered a reliable way to build wealth.
Unlike other forms of volatile investments, such as cryptocurrency, homeowners are more likely to see a return on their investment. What that return will vary. Several factors determine how much a home will sell for and the overall profit margin.
If you have a flexible buying and selling timeline, you can time the market to optimize your profits. Here’s a quick overview to help you understand the impact local market conditions have on home prices.
Number of homes available
Supply and demand is a fundamental economic principle, and that applies to the housing market. When there are more homes available for sale than the number of interested buyers, home prices will likely drop. This is known as a buyer’s market because it favors buyers. In a seller’s market, there aren’t enough homes for the number of interested buyers. As a result, prices will likely increase.
The number of available homes and interested buyers at any given time can be influenced by many elements. For example, as baby boomers become empty nesters, they may want to sell their family homes in favor of a smaller space. At the same time, millennials in their prime working years may finally be financially ready to start looking for starter homes.
Another factor that influences the price of real estate is a home’s location. Most buyers begin their home search by looking at specific neighborhoods. The more buyers who are interested in a neighborhood, the higher the prices.
Buyers tend to look for homes that are conveniently located near their workplaces. If they have children, they’ll also favor a location within walking distance of parks or a top-rated school, so include that information in any listing description. Other amenities, such as proximity to bike trails, restaurants, and cultural centers, can also make a location more desirable.
Over time, demand for a neighborhood can change, particularly as restaurants and retail stores go in and out of business. Desirable neighborhoods can shift as demographics start to change, so keep an eye out for new and emerging communities. You’re more likely to get the best return on investment if you buy into an emerging neighborhood early and sell before it loses its appeal.
State of the economy
The state of the economy, including the inflation rate and the job market, also influences home prices. Pay attention to economic trends and predictions so you can be better prepared for changing home values in your area.
Prices on everything from milk to gasoline tend to increase over time. When prices increase rapidly in a short period of time, the economy is considered inflated. During inflation, home prices tend to increase.
There are several reasons why this happens. First, when consumers have greater purchasing power, there’s more demand for homes. But other factors, such as the cost of labor and materials to build new homes, also drive up home prices.
The job market’s influence on home prices tends to vary more by location. In general, when the job market is strong and unemployment is low, consumers can better afford homes, increasing demand and, therefore, home values.
That’s why home values will often increase when new businesses or industries set up shop in a community and decrease when businesses close. Just consider how a lack of available jobs turned some communities into old ghost towns.
Whether you’re buying or selling, it’s important to keep an eye on the economy. Don’t be disheartened if current economic conditions don’t suit your needs. The economy is cyclical, which means there will be inflations and recessions. If conditions aren’t right for you now, they will likely be better in the future.
Read more: Housing market recession
Interest rates have a significant impact on the price of homes and influence the number of buyers in the market.
Most buyers require a mortgage to purchase their home. When mortgage rates are high, borrowing becomes more expensive, and buyers may think twice about taking on more debt, which decreases demand for homes.
As a buyer, the best time to purchase a home is when mortgage rates are low because you’ll pay less in interest over time. Lower interest rates also benefit home sellers because there will be more demand, which increases home prices.
Federal credits or subsidies
To stimulate the housing market and create more demand for homes, the government has historically offered tax breaks or credits, incentivizing buyers to purchase a home. As a buyer, you’d ideally want to take advantage of any incentives as soon as possible.
Still, you should only spend as much on a home as you can afford. Some buyers, particularly first-time homeowners, might be tempted to spend more on a home to take advantage of credits. It’s more important to afford your monthly mortgage, insurance, and utility payments than to get a tax credit.
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