This article was co-published with our inhouse expert, Anna Kučírková
What is the “housing market”?
The housing market, also known as the real estate market, refers to the supply and demand for homes.
Usually the term is used in reference to a particular region. It could refer to a housing market for an entire country, or it might refer only to statistics for a particular state or county’s housing market.
The housing market is made up of:
- Homeowners selling their properties
- People shopping for a new residence
- Real estate agents (those who hold a real estate license)
- Real estate brokers (agents who also passed a broker license exam. They can own a real estate firm, or hire agents to work for them)
- Real estate investors who buy and sell properties for investment purposes
What factors affect the housing market?
Factors in the real estate market are interrelated. Interest rates are one major determinant since a lower interest mortgage rate makes housebuying more affordable.
When the inventory of homes for sale is large, prices usually stay steady or adjust downward. Inventory is made up of pre-owned homes plus new building that’s taking place. When the general economy is good and unemployment is low, builders stay busy.
Rising or falling home prices also have a significant effect. During periods of inflation, housing prices tend to rise.
Recessions don’t typically have a significant effect on widespread home values – the one exception was during the Great Recession from December 2007 to June 2009.
Many homeowners have recovered from that dark time, and it’s widely believed that a housing market crash like that isn’t likely to repeat itself even if there’s another economic decline.
“It was called the Great Recession for a reason,” says one director of economic research. “That was a really big one in the course of recent history – that was an exceptional recession.”
Even the time of year affects the housing market. Investopedia explains
“One of the factors impacting housing supply and demand is the seasonality of your market. While you might not think the seasons of the year have an influence on the price you are paying or asking for your home, it makes a big difference – in some cases, as much as 10%.”
Investopedia relates that each region can be a bit different. Some cities like Phoenix experience an influx in winter months by people from areas like the Northeast. Cities like Denver, usually briskly selling homes, see a slower market when the cold weather arrives.
Parents don’t like to interrupt their child’s school year, so sales are often highest in the spring housing market – toward the end of the school year – and at summer’s end before a new school year begins. And very few people choose to complicate their lives and move during the holiday season – which is essentially between November and January.
What is a “seller’s market” or a “buyer’s market”?
A seller’s market, according to bankrate.com, occurs when there are more real estate buyers in the market than there are sellers. When demand is higher than the supply, home prices increase, which benefits sellers.
Some things that characterize a seller’s market include
- There’s little room to negotiate prices because demand is high
- Usually it occurs when the economy is good and there’s low housing inventory available
- Rising prices, buyers offering non-contingent contracts, and they’re less likely to ask sellers to help pay points or closing costs.
A buyer’s market, on the other hand, means there are more sellers available than buyers. Demand for homes is lower than supply, and home prices decrease, benefitting buyers.
Some things that characterize a buyer’s market include
- The opportunity to buy a better home at a lower cost than in a seller’s market
- More choices among available homes
- Listing prices may be lowered to entice buyers or other incentives may be offered
What is the connection between the mortgage industry and the housing industry?
It’s pretty simple, actually.
Home sales are financed by borrowing money from banks, mortgage companies, and a few other sources like credit unions and some government agencies. You can also work with a mortgage broker, who scrutinizes different lenders to find the best home mortgage deal for you.
Low interest rates help drive housing booms. High interest finance rates do the opposite.
One very important factor is actions taken by the Federal Reserve Board – they set a rate at which they lend money to banks and other institutions. Those institutions turn around and set the rates at which they will lend to people or businesses seeking a real estate loan.
What’s been happening recently in the U.S. housing market?
In forecasts prior to 2019, many real estate experts anticipated the housing market would slow down during the year. They predicted that the upward trend of home prices in the housing economy would continue increasing at a slow pace, and that mortgage rates would rise slowly.
One economist from the National Association of Realtors (NAR) said at that time, “The days of easy price gains are coming to an end.” The inventory of homes for sale then was quite low, with some even referring to it as a housing shortage.
Realtor.com posted a prediction that average mortgage rates would be 5.3 percent during 2019, reaching 5.5 percent by the end of the year. Others agreed that mortgage rates would end up greater than 5.0 percent in 2019.
Fast forward to July. What actually happened in the first half of 2019?
The rise in home prices did slow down, just as predicted.
But mortgage rates unexpectedly dipped. Forbes.com reported that by July mortgage rates had hit their lowest point since 2016 (averaging just 3.80% according to Freddie Mac), prompting a surge of refinancing in late June. When mortgage rates drop like this, it entices Americans back into the housing market.
What was the recent plan of the White House that could affect housing finance?
Two mortgage giants, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) are typically referred to as Fannie Mae and Freddie Mac.
These two entities were bailed out and taken over by the Federal Government during the 2008 subprime mortgage crisis mentioned earlier. It was believed that their losses threatened to disrupt the U.S. housing finance market.
The Trump administration along with the Treasury Department has been working toward returning Fannie Mae and Freddie Mac into private hands. Opinions vary on whether this is a good idea.
Politico.com explains that Republicans have long argued that the companies have an unfair competitive edge over private companies because of their government guarantee. Some even blame the companies for the financial crisis, pointing to their over-extension in subprime loans.
Democrats, meanwhile, are fiercely protective of the companies’ affordable housing goals, which they see as a priority in any discussion of housing finance reform.
So what’s predicted for the housing market in 2020?
If rates remain low and the economy stays strong, more people will be looking to buy.
Even though some are nervous about the possibility of a recession, there are several indicators that the housing market continues to be robust.
Forbes reports that the U.S. economy has been growing for 121 consecutive months, the longest run in the nation’s history. Home equity is soaring. House flipping is at an all-time high, and Millennials are now buying homes in much larger numbers than previously.
How do home improvement and remodeling correlate to the housing market?
Money spent on home improvement and remodeling is often an indicator of a robust housing market.
Sellers renovate or upgrade before listing their home, and may take out a home equity loan to get those changes made quickly. Buyers make changes shortly after taking ownership to suit their tastes and needs.
What is the plan to fix a “broken housing market” in Britain?
In 2017, the government of the UK published its plans to reform the housing market and boost the supply of new homes in England. The Ministry of Housing themselves titled the paper “Fixing Our Broken Housing Market.”
For quite some time there’s been a shortage of homes across the country, and builders have been unable to keep pace with demand. Add to that skyrocketing housing prices and expensive rents, and you can understand why first-time home buyers and young professionals are facing a crisis.
The UK government’s goals are to:
- plan for the right homes in the right places
- build homes faster
- diversify the housing market
- help people now
There are plenty of ideas for how to fix the housing crisis, such as increased numbers of modular homes, increased use of property technology to help developers identify development sites more cheaply, and the “Build-to-rent “ model – popular in the U.S., Germany and France – but a relatively new idea in the UK.
Politics is a large part of the challenge. Regulations will need to change, rent controls may need to be put in place, and international investment welcomed. One member of the British think-tank New Economics Foundation says
“The housing crisis is the result of policy choices that could be undone in less than a generation. If the government implemented policies that prioritized the provision of secure, affordable housing for everyone – regardless of age, class, race or gender – in just 10 years’ time young people’s housing options could look radically different, and a lot more hopeful.”
Why is there a housing crisis in California?
Like the UK, California also has a housing dilemma related to politics. Five of California’s major cities are among the ten most expensive places to rent in America.
For example, in San Francisco the average 2 bedroom apartment costs nearly $4000 a month. The state has set target figures for low-income housing production, but in most areas of California, they’re way behind in meeting those targets.
It’s not merely that there aren’t enough houses being built. For a variety of reasons, municipal governments often block the way for new construction. Restrictive zoning laws, objections ranging from union interests to environmental concerns, and opposition to lower-income housing within the community are just a few.
Wealthy suburban communities resist the addition of more housing since homeowners want to protect their investment and the high value of their homes. Lawmakers don’t want to alienate them by forcing the addition of new affordable housing which might bring prices down.
There’s also the resulting traffic problem.
The location of these high-priced, low-density suburbs near urban areas forces low-income to middle-income workers employed in the city to put up with long commutes. Traffic is increasingly heavy since none of those workers can afford to buy or rent in the affluent areas.
California’s housing issues aren’t likely to be solved until all areas of the state are willing to embrace the need for higher density housing. That’s going to require a serious change in the attitudes of many of their citizens.
A Home-buying Strategy
If you’re a first-time homebuyer, practice Dave Ramsey’s approach. Getting these practices in place will ensure you’re in a much better position to get approved for a real estate loan.
- Pay Off All Debt and Build an Emergency Fund
- Determine How Much House You Can Afford
- Save a Down Payment
- Save for Closing Costs
- Get Preapproved for a Loan
- Find a Home for Sale in Your Price Range
- Research Neighborhoods for Best Fit
- Attend Open Houses and Think Long Term
- Make a Competitive Offer (That’s Within Your Budget!)
- Prepare for Closing