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What is the Effect of Economic Growth on the Housing Market?

The state of the economy and shifts in the population significantly impact the housing market. The housing market usually sees healthy growth when economic times are good. On the other hand, when the country’s economy goes down, the housing market doesn’t do well and sometimes sees a big collapse, and even then, it sees no buyers.

This shows a huge correlation between economic growth and the housing market. The different housing market segments are affected by economic growth in a noticeable manner.

Effect of Economic Growth on the Housing Market

Major housing segments

There are two main housing market segments that are highly affected by economic growth. They include housing starts and home sales. Housing starts are often tracked depending on the number of new residential construction projects that begin in a specific month. In robust economic times, most businesses thrive easily, and more people can buy new homes.

A rise in housing starts is a clear indication of a healthy economy. This directly affects the related markets like land sales, raw materials, mortgages and employment. As a residential property owner, you need to ensure that you work with great property management companies.

Everest, Mynd and APM are some of the leading names that provide hassle-free and smooth property management solutions in Boulder. Even when the economic growth shifts in the negative direction, the experts will deliver a steady and reliable return on investment for your residential property and keep it in top shape.

Home sales reflect the economy

There is a very strong correlation between home sales and the state of the economy. Home sales fall when there is a fall in economic activities. During these times, the supply of money gets more restrictive. This makes it harder to borrow money from financial institutions. And this means that the number of house buyers entering the market is very low.

When the buyers are few, the existing residential properties on the market are likely to take a lot of time before being bought. You need to understand that the money supply in an economy is critical to constructing disparate properties. If the supply of money in the economy is consistent, there will be capital to buy raw materials and pay workers. Conversely, when it’s too difficult to make money, housing demand sees a downward spiral and home sales are likely to dry up. Ideally, economic growth should be in line with the growth of real estate. 

There are several economic growth factors that affect the housing market, and they include.

Interest rates

When the economy is stable, the interest rates for different loans are fair, and home buyers can quickly repay the loans without a lot of hassles. Interest rates significantly influence the amount of money you will pay monthly for the mortgages.

The higher the interest rates, the higher the cost of the mortgages, and this will reduce the demand for the houses. Unlike renting, high-interest rates make the rental investment very attractive. This is because homeowners are likely to earn more from their investment while tenants are likely to pay more for rent.

Revenue

The demand for the houses depends on the revenue the target buyers earn from their investments. With significant economic growth, there is an increase in wages, and this implies that many people can spend more on housing.

The housing demand is often elastic regarding the revenue different individuals generate from their investments. Simply, economic growth ensures that companies generate great revenue that improves the housing market.

Employment rate

This is very straightforward. The higher the employment rate, the more money home buyers will have. That means they can easily buy new homes without struggling too much because of favorable economic conditions.

With positive economic growth, many people can afford a house as they can earn salaries from their respective jobs. Without employment, people will rarely attempt to enter the real estate market.

Mortgage availability

When the economy is not at its best, lots of banks and other money-lending institutions tend to put a lot of restrictions on mortgages. This limits the borrowing power of those interested in buying new homes.

On the other hand, when there is economic growth, mortgage availability increases. There is also high flexibility when applying for mortgages because the lenders are sure that borrowers have a steady income to help them pay the loan. The number of lending institutions also increases, leading to the housing market’s growth.

Government subsidies

This could be direct or indirect payment to individuals or firms in the real estate business. It can also be in the form of a tax cut to enable the housing market to expand its operations. Government subsidies often offset market failures to achieve significant economic efficiency.

With great economic growth, the size of subsidies that the government can give to different housing firms is relatively large. Knowing the size of existing government subsidies can help determine raw materials supply and demand changes. Thus, you can quickly identify false trends. 

 

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