What Makes the Housing Market Fluctuate
The housing market in the United States continuously cycles as a result of many aspects such as interest rates, foreclosures, and the economy. In addition, the job market and crime affect how much the local housing industry will fluctuate over time. Some other common factors to consider are how much housing inventory is available and how many people are looking to buy a home. Both of these things set the stage for whether we have a buyer's market or a seller's market.
Supply and Demand
The housing inventory is one factor that can shift the market quickly from a seller's market to a buyer's market. In a seller's market, the home's owner has the advantage because there are usually more buyers than homes available. When there are more buyers than homes available, home values increase, and prices rise.
In a buyer's market, it is the opposite: there are more houses to sell than buyers need. Buyers tend to have more choices, and sellers are more willing to negotiate things like prices, closing costs, and repairs.
Like in most industries, supply and demand work against each other, sometimes finding a balance. When the market is in equilibrium, there is a good supply of houses available that balances with the number of buyers wanting them.
In a seller’s market, the homeowner has the upper hand. As more people are looking for houses, homeowners may have multiple people bidding on their home, driving the price up. Summer is a popular time for a seller’s market because more people tend to move during this season.
Potential buyers have to prepare extra during a seller’s market. Getting pre-approved for a mortgage can prevent any stalling, which could lead to someone else swooping in to purchase the house. When there are limited homes available, it also may not be a good time for additional requests, such as asking for a lower price on included appliances.
Buyers have the advantage in a buyer’s market. With plenty of homes to choose from, they can be more particular and even negotiate prices. It may be a good time to ask for repairs to be completed by the seller prior to moving in or possibly a lower closing price.
Since most people are looking for houses during the summer, buyers will usually have less competition in the wintertime, making it more likely to get better deals.
In a buyer’s market, sellers will want to be prepared to negotiate below the asking price. They should also have a pre-inspection and appraisal so that if problems come up, they can either do the repairs or lower their asking price accordingly.
One factor that affects the housing market is that houses are not fluid like many commodities. It takes time to build new homes and remodel ones in need of repair before being put back on the market. As a result, the housing inventory is constantly fluctuating. For example, when natural disasters destroy homes, they adversely affect the housing market: the supply of homes decreases while the demand for homes suddenly increases.
While the housing industry can be affected as a whole across the country, changes in the community affect their individual housing markets as well. If a large company that provided many jobs decided to move to another town, the supply of homes would likely increase due to fewer people relocating to the area for those jobs, as well as the possibility of current employees following the company to their new location. Higher crime rates in a neighborhood will drive people to sell their homes in order to move to a safer area, but there won’t be many people willing to buy the new supply.
Other industries also affect the housing market. During oil booms, when prices and demand are both high, the economy surrounding oil companies tends to pick up. This means that more workers can move into the area and buy homes. Adversely, when oil prices are low, smaller towns that focus on oil production will see a slump in their economy. This usually translates into fewer house purchases in the area.
On the opposite end of the spectrum, places that have experienced significant layoffs often end up with an excessive amount of homes that no one wants or needs. It is easy to see our overall economy has a massive impact on the housing market. When people are spending money and investing and the economy is booming, the housing market will consistently sway back and forth.
Demographics, or the statistical data of a population and the groups of people within it, plays a large role in the housing market. One of the major trends currently affecting the industry is the transition of baby boomers going into retirement. As the richest generation in U.S. history, the demand for second homes is increasing. In popular vacation spots, this means that the supply of housing is decreasing and house prices may begin to skyrocket.
Another possible outcome from the baby boomer generation is a greater supply in larger homes. As their kids grow older and leave the house, many people are finding that they have too much space. Assuming that a lot of empty-nesters will move into smaller homes, their more spacious houses will be up for sale. This could result in a buyer’s market that would provide a larger pool of houses to choose from - especially for families looking to upgrade.
The cost of building materials fluctuates, and this causes changes in the housing market. In 2021, the price of lumber is up 228%. Building a house costs much more now than it did even a year or two ago, which presumably means people are likely looking to buy a home instead of build one. Because there are more buyers in the housing pool, demand is up and supply is down - it’s a seller’s market.
How COVID-19 Affected the Housing Market
COVID-19 brought about several changes in the housing industry. During the pandemic, people were afraid to move because of the uncertainty of the virus. This caused mortgage rates to fall to historic low rates, which eventually led to an increase in first-time home buyers when it was safer to move. In return, supply of housing went down, making most places in the United States currently a seller’s market.
Even now in 2021, the pandemic continues affecting the housing market. Some areas faced worse consequences than others due to the local conditions of the market - but are now on an uptick. Places like New York and Detroit had significant declines in home sales in 2020. Part of that was the very restricted activities seen in those areas for any non-essential activities which caused people to move to suburban areas with more indoor and outdoor space.
The mass exodus from these large cities caused housing prices to plummet. Now that shops and businesses are opening back up, renters and buyers are taking advantage of the affordability of living in these areas.
Even with tightened lending and fewer homes available to see, the homes on the market are selling at a faster pace. The average time a home is on the market before it sells is eighteen days. Some 45% are selling within a week of being on the market, and 58% are selling within the first two weeks.
For the most part, the pandemic has not seemed to harm the housing market much compared to the housing crisis of 2008. However, it may be too early to know the full impact as many foreclosures and delinquent accounts are still looming in the background. As of the first quarter of 2021, foreclosures are down 80% due to various foreclosure bans and a ban from the Federal Housing Finance Agency to protect homeowners with Fannie Mae and Freddie Mac loans.
As more people return to work and restrictions are lifted from banks and other lenders, we will know more in the coming months about how deeply foreclosures may affect the industry moving forward. However, despite one of the most competitive housing markets ever paired with the effects of a pandemic, the housing market is still moving forward.
It is apparent many factors cause the constant fluctuation of the housing market. However, probably the biggest is the influence of supply and demand constantly fighting to reach equilibrium. Unemployment and the job market, the economy, interest rates, natural disasters, crime rate, foreclosure rate, and many other factors influence supply and demand, making it all tied together.