Financeheaven.net blog

The Business Cycle and Buying a Home

Recession and Expansion

Sometimes the economy is brisk and everybody feels confident about his or her prospects for the future. Therefore, they tend to spend money. People eat out more, buy new cars, and they purchase new houses.

But ultimately, for one reason or another, the economy slows down. Companies lay off employees and people are more careful about where they spend money, probably saving more than normally. As a consequence, the economy slows down even more. If it slows enough, we witness a recession.

During such a time, fewer people are buying homes. Even so, certain homeowners find themselves in a situation where they have to sell. Families grow beyond the capacity of the home, employees get transferred, and some might potentially find themselves unable to make their mortgage payment - perhaps because of a job loss in the family.
In the business cycle of real estate, there are buyers’ markets and sellers’ markets.  The whole market is based on supply and/or demand.

Supply and Demand

During sellers’ markets, homes sell fast and sellers have a lot of pricing power. Consequently, prices rise more rapidly than at other times. During buyers’ markets, homes may remain on the market for some time before selling, so sellers become more flexible and may even decrease their prices.

In real estate, the connection between supply and demand is evaluated as “available inventory.” At the current sales pace, how long would it take to sell the total number of homes available on the market? This is the method used by the real estate industry to measure inventory.

Inventory can be measured in weeks and months. Longer inventory periods are connected with buyers’ markets. Shorter inventory times are associated with sellers’ markets. Certain buyers and sellers hope to time their purchase to benefit from market cycles.