How do you explain "The Market"? When you sit down with a couple at their kitchen table, and they are looking back at you with hope in their eyes. They are waiting for that "HGTV moment"...they are waiting for you to tell them that their house is worth so much more than they paid for it only a few short years ago. But what if it's not? What if your CMA report says it's worth far less than they hoped? Does the average consumer know what the market is and how it affects their home's value?
If you are a real estate professional you might find this blog a little boring. But if you are a person who has ever heard "the market is doing this", and wondered what the heck "the market" is, I hope you will find this an interesting read.
The market is a localized entity comprised of four important factors. The four factors that make up what real estate people call "the market" are employment rates, interest rates, income rates, and home inventory.
Some areas of the nation have high rates of employment and others have lower rates of employment. The more people have jobs in a given area the more homebuyers are available and therefore the prices of homes may be higher. However when employment rates are not favorable there are fewer people that can buy a home and therefore home prices come down in order to compensate that factor.
This one is probably the most confusing of the four. Basically, the Federal Reserve dictates the interest rate that banks borrow money at and therefore the banks dictate the rate that we are charged on a loan. Why should you care about this? Because when interest rates are low you can afford more house than when they are high. For example lets look at a $100,000 house on a 30 fixed rate mortgage. If the interest rate is 5.75% your monthly principal and interest rate payment would be about $583.57 but if the interest rate was 6.75% your monthly principal and interest payment would be $648.60. That means that for the same house you will be paying $60 a month more. In other words if you buy a house when interest rates are low you will be able to afford to get a little more home than when they are higher.
In some areas of the nation income rates are higher than in others. So a nurse might make one salary if they worked in one town and a very different salary if they worked in another. The income rates of the people in the area have a lot to do with the housing prices. My market is a perfect example. For $350,000 you can get in the best neighborhoods, with swimming pools, 4 to 5 bedrooms, finished basements, granite counter tops, the works, but if you went to New York City or LA you might get a 1 bedroom studio apartment. So if the income levels in your area drop so can the home values.
This is the part of the market that you will hear agents refer to as "it's a buyer's market", or "it's a seller's market". When there are more homes for sale than people buying houses it's called a "buyer's market because buyers have the upper-hand. With more houses to choose from buyers can be more selective and sellers might have to compensate for that factor if they want to sell. Now when there are more people that want houses than there are people selling their homes it's called a "Seller's market" because sellers have the upper hand. With more people buying houses their house is in more demand and therefore they can ask more for their hot commodity.
These are the factors that real estate professionals refer to as "the market". They don't account for how much you love your home, how much you owe on you mortgage, how quickly you need to move, or any of the emotions tied to your home. They are emotionless and they change lives. This is also why it is important to consult with a REALTOR before deciding how much you want to sell your home for; over-pricing is the number one reason that houses sit on the market.
I hope this blog was informative and clears up any questions you might have about "the market". Please check back and see my future blogs. I will try to write a new blog each week so come back soon.