There's A Housing Recession: Why That Is And Why It's Important
However, it might surprise you to learn that the collective housing market is currently in a recession. This can mean quite a few things if you're interested in buying a house, but first, it's important to know some background about the whole situation.
What Exactly Is A Housing Recession? Why Are We In One?
A housing recession is technically classified as a period of time in which housing prices decrease for six months in a row. In the case of the current housing market, prices have been decreasing since January, so about 8 months.As to why the housing market is in its current state, there are a few factors involved.
Skyrocketing Housing Prices
Despite currently being in a housing recession, housing prices have been climbing and climbing and climbing year after year for over a decade, with high demand and limited amounts of housing being built over this same period being the primary driver.While people's willingness to pay exorbitant amounts for housing has been unusually high for a while, the general population has reached its breaking point and demand has started to go down.
Especially with the economy being in its current state, a rise in demand shouldn't be expected any time soon.
Inflation
Inflation has been dramatically eating into everyone's finances and purchasing a home is something lots of people have had to put on hold. Everything from gas to groceries to cars has increased in price dramatically and purchases that were feasible only a year ago are now out of reach.Especially for people just starting a family or a career, buying a house amid soaring costs in other parts of their life simply isn't an option.
Raised Interest Rates
The United States Federal Reserve has recently decided to raise interest rates in order to rein in the effects of inflation.The way the Federal Reserve works is that it loans money to banks with a set interest rate, also known as the federal funds rate. In order to make money, banks then need to loan money to their clientele at a rate higher than the federal funds rate.
By controlling the federal funds rate, the Federal Reserve can effectively control the interest rate on bank loans. By raising interest rates, people take out fewer loans, which decreases the overall money supply and thereby reducing inflation.
What this means from a home ownership perspective is mortgages are getting a lot more expensive, which is encouraging people to not take out home loans and leading to a reduced level of demand.
Why Is All of This Important?
If you're interested in buying a house, or a least just thinking about it, many of these recent developments in the housing industry will have a significant impact on your ability to make a purchase.To begin with, housing prices are starting to lower and this trend looks like it's going to continue long into the future, with anticipated economic slowdown making housing purchases a less than optimal decision for many.
This can be good on one hand because it means buying a house is going to cost less than it would normally be, but you might also end up buying a house that's worth less than what you're paid for down the line, which could be a huge issue.
Secondly, even though housing prices are lower, interest rates are high and might continue to climb if the Federal Reserve deems inflation a big enough problem. You'll probably end up paying more for a loan taken out now than you would if you waited a couple of years, when inflation is less of an issue.
Additionally, many of the problems associated with the housing market are also impacting construction companies. Inflation and high mortgage rates are making it difficult for developers to make more housing, which can potentially lead to a rise in housing prices in the very long-run when the economy picks up again.
