What's Going On With the Housing Market

What's Going On With the Housing Market

With home prices way down compared to years past and interest rates at historical lows, now should be a good time to buy a home.

And, okay, September’s new home sales were a little better than expected. But Americans are still very reluctant to buy new homes. Why?

(Here’s how interest rates affect the housing market.)

At the peak of the housing boom, new home sales were above 1.3 million. This September, they were at 313,000. According to the Standard & Poor’s Case-Shiller home price data that came out this Tuesday, U.S. home prices are down almost 4% compared to last year.

If you had a solid emergency fund and felt good about your personal money outlook, now would be a great time to buy a house—but low prices and interest rates aren’t enough.

The Factors That Impact the Housing Market

The Fed has been trying to influence homebuyers by tweaking interest rates, but interest rates are only one part of the big picture. Here are the important factors to look out for:

  1. Economic Growth: You need money in order to buy a house … so higher economic growth often means that people are making more money, and that they can spend that money on a home. On the flip side, when the economy drags its feet, real estate is generally sluggish, too.
  2. Unemployment: If people fear for their financial or job security, they might not be ready to plunk down a big down payment for an investment in the future. This is especially true after so many have seen in the past few years that the “investment” in a home doesn’t always pan out.
  3. Consumer Confidence: This is a measure of how people think the economy will do in the future. If most people are convinced that the housing market will keep tanking, they’ll put off buying a house until prices are even cheaper. And, as we learned this week, consumer confidence is at a two-year low.
  4. Demographics: Shifts in the demographics can have a big impact on supply and demand for homes. For example, a whole generation of home-buying baby boomers significantly increased demand for new homes. Now, as boomers get ready to retire, they might, for example, shift the market by downsizing to smaller homes.
  5.  Interest Rates: Low interest rates (as set by the Fed through the federal funds rate) mean low mortgages. That, in turn, means that people can borrow a lot of money and barely pay any interest. Opportunistic homebuyers will see that as a good chance to buy in.
  6. Legislation: Sometimes, the government gives tax credits or subsidies in an attempt to temporarily boost demand for real estate. For example, the first-time homebuyer tax credit in 2009 led to about 900,000 additional homebuyers, according to the National Association of Realtors. On that note, President Obama has proposed a mortgage refinancing plan—here’s what you need to know.
  7. Lending Standards: Back in the housing bubble, banks got into trouble by lending too much money to borrowers without the ability to sufficiently pay it back. But now, in addition to asking for higher credit scores and larger down payments before lending money, banks are also dealing with “more and more onerous” documentation standards. In reaction to the faulty lending standards of a few years ago, the pendulum has swung the other way. That means that it’s harder for most people to even get a mortgage than before.

What This Means for Us

Economic growth: not so great. Unemployment: high. Consumer confidence: at a two-year low. Lending standards: strict and forbidding.

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Some analysts predict that housing prices will continue to fall as much as another 5% to 10%, or even more.

When it comes to your personal decision about whether or not to buy, start by thinking about your needs. At this point, we suggest thinking about houses as places to live … not purely as investments. If you’re in the market to buy a new place to live, now (or soon) could be a great time to buy.

Before pulling the trigger, have your finances buttoned-up: Make sure you can fully afford the mortgage, that this home has the resources you’ll need for at least the next five years and that you have a reliable income for the foreseeable future. For a checklist to help you figure out whether you’re ready to buy a home, read this.

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