5 Factors That Affect Home Prices

If you are getting ready to purchase a home, you’ve probably done a lot of research and self-examination about your financial situation. Maybe you’ve been putting away money for your down payment or are being extra careful to pay your bills on time to build your credit score.

While these are all extremely important actions, you should also make sure you are paying attention to the external events that are going on with the market and the economy to have an effect on what kind of home you can afford.

1. Supply and demand. Just like any other economic factor, housing hinges significantly on supply and demand. On the supply side, if there are many empty houses standing around, there is an oversupply. Buyers can be much more discerning and can take their time making their decision because the house they’re looking at is unlikely to be snapped up while they are considering their options. Homeowners are therefore more likely to lower their asking prices to entice buyers with a bargain.

On the other hand, a housing market that doesn't have enough houses for sale is a sure way to send prices skyrocketing. Sellers can increase their prices without losing buyers who are trying to out-bid each other for the available homes.

2. The economy. As the United States saw during the Great Recession, the housing market and the economy at large have a massive effect on one another. There are many facets to this relationship, but the primary factor is the fact that when the economy is doing well, people tend to make more money and are more likely to consider upgrading or buying. Because of the increase in demand for homes, prices are marked up.

3. The season. Homes are most commonly bought and sold during the spring and early summer – a trend that is seen for a couple of reasons. First of all, the weather is generally nicer during those months, making the moving process much easier. Also, many homebuyers have kids in school and would rather not force them to start at a new school halfway through the school year. Plus, in a self-perpetuating pattern, the most homes are on the market during these months.

Because more people are out shopping for homes in these months, prices tend to be higher than in the fall and winter. You may be able to buy the same home for less during the off-season.

4. Mortgage availability. If more people are qualified for a mortgage, there are more people likely to buy a home. While it sounds simple, what makes someone ‘qualified’ for a loan is largely subjective. For example, if lenders are looking to loan out money, they may relax their standards somewhat and either lend money to borderline candidates or lend out more money to a borrower than usual. When more people are able to borrow greater amounts of money, it leads to a spike in housing prices as homeowners can raise their prices. However, when lenders tighten up their standards, housing prices tend to drop.

5. Interest rates. In a similar vein to mortgage availability, interest rates have a massive effect on home prices. They’ve been at historic lows for years, with all indications that they will be rising in the very near future. For those applying for a mortgage loan, the interest is going to have a huge impact on how much you can afford. When interest rates are higher, borrowers cannot afford as expensive a home as when the rates are lower. So, when rates rise, sellers won’t have the luxury of multiple qualified buyers as they have had during this recent resurgence in the market.

BACK TO KNOWLEDGE CAFE