How Economy affects Real Estate Market

Published: 18th February 2010
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The economy is something that all people have to watch for. For the past 2 years, every people in this country have praying for its improvement. Because of the recession, many got hurt from the process. This is because it was accompanied with inflation and unemployment.

The existence of these two things had a major effect on the real estate market. Since the recession, unemployment and inflation generally caused problems in the real estate sector. Because people had no jobs, they had problems paying their mortgage. Because of inflation, interest rates became higher. Inflation also caused people to reduce spending, which lead to low sales, which also caused the lowering of the market values of the houses. It also has a domino effect to the financing sector. Because home values dropped people had difficulties obtaining refinancing. As a result, foreclosure rates increased. And the lending industry had to hold back on financing as they are incurring more and more losses.

But now, the economy is said to improve. As per the latest report, the GDP has been increasing. From the last quarter of 2009, there was an increase to 5.7% from 2.2% of the third quarter. This is such a sign of improvement. But with growth the economy has obtained, how will this affect the real estate market?

As what experts think, this kind of increase isn't enough to sustain the economy. Yes, the increase is a good sign. However, with the rate of increase the economy has, it would not be sufficient to say that recovery would take place anytime sooner. Hence, this would also mean that the real estate market would not be any closer to its recovery as well.

The real estate market is affected much by the growth of economy. Although programs created by the government like the first-time home buyer tax credit has played much role in the boost of sales, it wouldn't be enough to help sustain the sales in the future. For one, this program will expire. It may have been extended but there will be a possibility that this program would come to its last for this year. Why? Other sectors of the government are deprived for the budget. Billions or even trillions of dollars have already been expended just to help improve the real estate market. There has been too much government spending already. Second, there are still underlying issues as to unemployment. Home purchase is a big expenditure. Even with the affordable rates, one will have difficulties getting mortgage if people do not have stable income sources. Third, inflation continues to occur. And soon enough, the interest rates for mortgage would increase. Once the funds for the stimulus package will be depleted, it is very possible for the interest rates to inflate as well. And people are not in hurry to buy houses, even if the housing programs have been extended. So even if the tax-credit program still exists; the thought of getting mortgage can be unattractive (unless people pay cash).

So, even if the current economy is geared towards improvement, it would still take quite some time before it could pull the real estate market towards its own improvement. There can only be baby steps. Unless issues for employment and inflation are properly taken care of, probably this will be the time the real estate market would show drastic improvements. Besides, the economy is far from stability. There are so many things to watch out for this year that could impact highly the housing sector.

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