(Mar 20, 2023)
Trough and Peak of the Housing Market Cycle
The trough is the lowest point in a business cycle or in an overall downward price movement for real estate. The residential housing market has been considered as one of the first areas to show signs of a recession and post-recession recovery as more people decide to buy homes in emerging markets.
When the housing market is witnessing a peak, the demand for homes increases, which increases home prices. This leads to speculators purchasing homes to resell them at inflated prices. As more potential buyers enter the market, more properties are sold, which further boosts home values.
However, once there is an increase in the supply of homes – when market activity reaches its peak – there will be a reduction in demand as well as too many properties being available on the market. This leads to buyers or investors not selling their properties at higher asking prices and instead of making a loss if they want to sell their property. As a result, home prices decline.
Supply and Demand in the Rental Market
The forces of demand & supply determine the price of a home. The demand for homes is measured by the number of potential buyers currently looking to buy a home. The supply of homes is measured by the number of active listings on the market, including new homes currently under construction.
As the demand for rental housing increases, so does the rent rate. The local economy is generally growing, and many people are moving into the city for work. The result is more people competing for a limited amount of housing. The increased demand will prompt landlords to increase their rental rates. Many people will then opt to buy their own homes instead of renting. If many people do this, it can cause the price of houses to increase.
Tax Law Changes
The USA tax system has a lot to do with the ups and downs of home prices over the years. The most obvious connection is the deductibility of mortgage interest. When interest is deductible, more people can afford to buy a home, and housing prices rise, which helps to keep other home prices from falling.
Similar logic applies to when homeowners can deduct their property taxes from their taxable income. Land values are often based on the cost of new construction, so if a city increases its property tax rates, it might cause land values to rise and increase the cost of new construction.
The Tax Cuts and the Jobs Act, which took effect in 2018, affects mortgage interest calculation for people buying a primary residence, who itemize their deductions on Schedule A. The act limits state as well as local tax (SALT) deductions to $10,000. SALT deductions include state taxes, local property taxes, and sales taxes paid during the prior year.
This dragged down sales in 2018, with fewer people buying homes. As a result, the median price of a house in September that year was down 5.5 percent from a year earlier, according to the National Association of Realtors' year-end report.
Hot and Cold Periods of the Market
The weather is a factor in home prices because people are most likely to buy and sell homes at certain times of the year. These peaks and valleys have relatively little to do with the housing market's overall health, but they can influence what you'll pay for a new home.
In winter, people are least likely to buy or sell homes. Very few prospective buyers will look for homes in the dead of winter, so there won't be much upward pressure on home prices. Home sales start to pick up from April, which can cause home prices to temporarily rise through August or September. Then prices generally fall until spring.
Tips for Homebuyers
Due diligence
While you want to make sure you're getting a good deal, you also want to make sure the property is in tip-top shape. Sometimes the best deals are the ones you have to do a little extra legwork for. It's also important to beware of any "get rich quick" type of scheme; buying a property that a seller defaults on or through probate court.
You might end up with a property that has unfixable defects. Before you decide, it's essential to talk to an experienced valuer and make sure you're on the right path.
Seek opportunities to add value
If you have the time and skills, find properties with great potential yet can be bought cheaply. You should have a team of contractors ready to revamp the property and add value. Some places to look include listings for foreclosed homes and abandoned buildings.
This can be a great way to get a great deal of money. When the deal is done, you will be able to sell the property at half of its original price!
Buy when no one is buying
When the general economy is doing poorly, it is a great time to buy a home. Why? Because home sellers (flippers) need to get rid of their homes quickly, sometimes they will even be willing to sell the house for less than it is worth. Look at the prices and opportunities in the weak economy, and you will be able to make an informed decision on whether or not to buy that home.
Takeaway
The market for home prices is ever-changing, so stay informed!
(Mar 20, 2023)
