The Economy and Real Estate: A Tale of Two Markets
Updated: Jan 10
How does the economy affect real estate? It’s a common question and one that is much more complicated than you might think. In short, the state of the economy can positively and negatively impact real estate buying and selling.
As your trusted facilitator in selling and investing in homes, let us share how economic conditions can impact real estate deals through borrowing money.
Interest Rates are the key to borrowing money for a mortgage or construction loan. When the federal reserve increases rates, it becomes more expensive to borrow money. For example, a 6% interest rate is an annual percentage of the outstanding loan, owed to the lender for borrowing the money. If this rate increases, the borrower now owes more money to the lender for the same loan. The more expensive it is to borrow, the less activity there is in the marketplace of buying and selling homes because it becomes cost prohibitive.
Economic Condition: Downturn
What does an economic flux mean for the housing market? Well, it all depends on if you're a buyer or seller. Here are some tips from us that'll help you sail these choppy waters.
For Buyers: Cash Is King
During an economic downturn, consider paying cash for purchases. Even if you don’t have the full amount available immediately, try to spend as much cash as possible.
This will keep your mortgage to a minimum and give you more bargaining power when it comes time to negotiate with sellers, who may be willing to accept lower offers if they know they won't have to wait around for payment. It also makes you more attractive to lenders if you decide to apply for financing later.
For Sellers: Showcase Your Home's Value
Don't get discouraged if you're considering selling your home during an economic downturn! You can still attract buyers even in a down market by showcasing your home's value through great staging and photographs.
Additionally, be sure that your listing provides clear and concise information about your property so potential buyers can quickly determine whether it's right for them or not.
Leverage social media platforms such as Facebook and Instagram to get the word out about your listing; this could help draw in more interested parties and potentially drive up the price of your home!
Finally, consider renting your property for the time being until the market turns around. Most home buyers are pushing off their purchase until this time, so the rental market will be stronger in the short-term.
In case you're wondering when you're ready to sell your property, we will give you the best offer! We promise that you'll receive the most money possible for your property.
Economic Condition: Booming
If the economy keeps getting better, more and more doors will open for real estate buyers and sellers!
Here are a few things you might see during an economic boom:
Lower Down Payments
As the economy grows, lenders become more willing to offer lower down payment loans. This means that you, as a buyer, can purchase homes with as little as 3% down—sometimes even less! Lower down payment loans can be especially beneficial for first-time homebuyers who may not have enough saved up for a larger down payment. Additionally, many of these loans also have low closing costs, making them even more attractive!
However, be careful with these loans with little money down and the variable rates that come along with them. If you aren’t locked into a low interest rate, you could be subject to future increases which becomes extremely expensive on large principal loans.
Lower Interest Rates
An increasing economy typically means good news for you because lenders are likely to offer lower interest rates than they usually would in times of economic downturn. This can make it easier to afford your monthly payments and keep your debt load manageable.
This will give you a whole new perspective on your investment, especially for homes which you will be fixing up and renting. If you’re able to have a lower mortgage payment each month, you can cash flow much more and continue to make improvements to your property.
Longer Repayment Terms
With an improving economy comes more borrower-friendly loan products, such as longer repayment terms. This allows you to spread out your payments over a more extended period and potentially reduce your monthly payments significantly compared to shorter-term loans.
Plus, this may provide you with extra breathing room if you experience financial difficulty during your homeownership journey.
Economic Condition: Unsteady
The world has seen its share of economic uncertainty over the last few years, with events like war or the pandemic leading to significant market fluctuations. While it's normal to feel uncertain during these times, there are still plenty of ways to navigate real estate buying and selling through borrowing money.
How Borrowing is Impacted by Economic Uncertainty
As we mentioned before, when it comes to borrowing money for a real estate transaction, the lending process is impacted by both the current state of the economy and the borrower’s credit score. This means lenders may be more stringent about who they approve for mortgages and other loans when markets become volatile.
For example, lenders may require higher credit scores or lower debt-to-income ratios from borrowers than they normally would protect their investments.
However, this doesn’t mean that you shouldn’t try to borrow money during times of economic uncertainty—it just means you should be prepared for stricter terms than usual! If you have good credit and a steady income, you could still qualify for competitive loan rates even if economic downturns coincide.
What Else You Should Consider Before Purchasing Real Estate
It's also essential to consider factors beyond just borrowing money when purchasing or investing in real estate. Things like location, market trends, and potential rental income should all be taken into account before making a final decision on whether or not to buy a home or invest in property.
Additionally, keeping up with local news can help you stay informed about any changes due to economic uncertainty (like changes in tax laws). Doing your research ahead of time can help make sure you're making an informed decision when it comes time to make your purchase.
Wrapping It Up
There is no doubt that interest rates directly impact real estate transactions because they dictate how much money lenders are willing to lend and at what cost. Generally speaking, when the economy is strong, and unemployment is low, lenders are more likely to offer lower interest rates, making it easier for potential buyers to secure financing for their purchases.
On the other hand, when the economy is weak and unemployment rises, lenders tend to offer higher interest rates to protect themselves against loan defaults. This makes borrowing money more expensive and complicated.
Additionally, certain regulations may come into play depending on where you live, which could affect whether or not you qualify for certain loans or what type of interest rate you may qualify for when borrowing money for a real estate purchase or sale.
These factors indeed sound overwhelming and time-consuming for you, so we are here! Whether you are buying or selling, Fenix Property Group is here to help. We have the experience and knowledge to help you through every step of the process as smoothly as possible. No matter the market (or economic) conditions, we will work hard to get you the best deal possible!