Recession vs. Expansion

During a robust economy people feel confident about their prospects for the future. As a result, they spend money freely and consume more in general.  People spend readily on non-essential items, such as entertainment and dining out. They also spend more money on large ticket items, such as vehicles, vacations and housing.

As time goes by and the economy accelerates too much, people find double digit appreciation of housing as the market “overheats” and then, the economy slows down. In the inevitable slowdown, companies lay off employees and consumers have less money to spend.  As a result of the reduced spending, the economy slows even more. This decrease in spending impacts the housing market in two ways; there are fewer people in the market to buy a home, but (at the same time) there are more people who may need to sell their homes.

During these market slowdowns there are better buying opportunities available to those who are just entering into the housing market.  Sellers who are in a situation where they must sell their home will need to be much more flexible on their price and offer attractive terms to entice prospective buyers.

When the market slows, it enters into the “absorption phase” where new construction is decreased to less than demand and the excess inventory of homes is slowly absorbed into the market.  As the excess homes are purchased, most often at discounted prices, the demand will slowly begin to return and the market slowly begins to shift back into an expansion phase. During this renewed time of growth, it becomes viable to build new homes and thus, the market shifts again back to a seller’s market and prices rise up once again.

Successful investors recognize the long term trends. They buy in the down markets, most often against the advice of the “experts”. They sell just before the market peaks again, when most of the “advisors” are telling buyers they cannot lose in real estate.  Even a first time buyer can benefit greatly from knowing when it is the most opportune time to buy a home.

Renting vs. Buying