It is an axiom in real estate which housing markets are affected by the broader economy. When economic times are good, certain areas of the housing marketplace usually see healthy growth. When economic times aren’t so great, those same parts don’t tend to perform too well. The economy impacts the overall housing market and impacts two of its major sections in a particularly noticeable manner.
Housing Starts
The housing market has two major sections: housing starts and home sales. Housing starts are tracked by the number of new residential construction projects that start in any specific month. In powerful economies, people are more inclined to buy new homes and in weak economies they’re less inclined to do so. Housing starts are crucial indicators of healthy savings and they influence associated markets like mortgages, property sales, raw materials and labor.
Home Revenue
Home sales generally are directly tied to a market’s health and fall and rise with economic action. As savings slow, the source of cash will become more restrictive. As money becomes more difficult to borrow, fewer property buyers enter the home industry. With restrictive lending conditions making fewer buyers available, inventories of houses go up or take more time to sell. A larger source of a produxct coupled with a lower requirement for it generally forces prices downward.
Money Supply
The source of money in an economy is important to the overall health and especially to housing market health. If money’s too difficult to borrow, housing starts and home sales can dry up. If money’s too easy to borrow, too many buyers enter the home market, driving up prices for awhile until the inevitable market correction or even crash happens. Ideally, housing construction and home sales markets must align with economic action, but that’s sometimes not the case.
Market Crash
The 2007 housing market crash is illustrative of how housing markets operate at varying savings. Despite a March to November 2001 downturn, housing demand remained strong and therefore did housing markets. Simple currency climbed housing markets in the years after high interest rate subprime mortgage holders began defaulting in late 2006, as the economy slowed and unemployment climbed. Panic began about mid-2007 as continuing subprime mortgage defaults caused overexposed lenders to severely restrict home buyer credit offerings.
Vicious Cycle
Once an economy slows it can impact its housing markets within a sort of damaging cycle. Economic slowdowns influence housing markets, which consequently affect the economy as housing-related activities decline and slow overal financial activity. The vicious economic cycle breaks once economic progress begins and housing prices reflect consumers’ capacity to pay. The US housing market was particularly affected by its own crash, with prices starting to improve quite slowly along with the both slowly improving economy.