The Business Cycle and Buying a Home

Recession and Expansion

There are times when the economy is brisk and everyone feels confident about his or her prospects for the future. As a result, they spend money. People eat out more, buy new cars, and…

…They buy houses.

Then, for one reason or another, the economy slows down. Companies lay off employees and consumers are more careful about where they spend money, perhaps saving more than usual. As a result, the economy decelerates even further. If it slows enough, we have a recession.

During such a time, fewer people are buying homes. Even so, some homeowners find themselves in a situation where they must sell. Families grow beyond the capacity of the home, employees get relocated, and some may even find themselves unable to make their mortgage payment - perhaps because of a layoff in the family.

In the business cycle of real estate, there are buyers' markets and sellers' markets...and some markets in between. It is all based on supply and/or demand.

Supply and Demand - Inventory

During sellers' markets, homes sell quickly and sellers have a lot of pricing power. As a result, prices rise more rapidly than at other times. During buyers' markets, homes may sit on the market for a while before selling, so sellers become more flexible and may even drop their prices.

The market is determined by supply and demand.

In real estate, the relationship between supply and demand is calculated as "available inventory." At the current sales pace, how long would it take to sell the total number of houses available on the market? That is how the real estate industry measures inventory.

Inventory is measured in weeks and months. Longer inventory times are associated with buyers' markets. Shorter inventory periods are associated with sellers' markets. Some buyers and sellers hope to time their purchase to take advantage of market cycles.