Let’s be real: Most people don’t care about economics unless it’s relevant to them. But the business cycle has implications that affect the economy and the housing market, and understanding these implications can benefit you. Let’s take a look at some key economics terms to get an understanding of how business cycles affect the housing market, and what that means for you.
What Is the Business Cycle?
The term “business cycle” refers to fluctuations in economic activity, defined by periods of expansions and contractions.
Expansions are periods when the economy is growing. Typically, during expansions, businesses grow, unemployment is low and consumers spend more money. The period leading up to the 2008 recession is an example of an expansion. The peak is the highest point the economy can be, and it occurs at the end of an expansion before the economy begins to contract.
Contractions are periods when the economy shrinks, and are often referred to as recessions or depressions when they are severe. During contractions, businesses don’t produce as much, there is high unemployment and consumers spend less money. Our most recent contraction was in 2008. The trough is the lowest point of a contraction, and it occurs before the economy begins to grow again.
How the Business Cycle Influences the Housing Market
When the economy is growing, home values tend to increase. Employment is higher, so more people can afford to purchase homes, and new construction emerges. Because individuals want and can afford to buy, it’s a perfect time to sell your home and purchase a new one or become a first-time home buyer.
Mortgage Interest Rates
The Federal Reserve changes interest rates based in part on how the economy is running. When the economy is running well, interest rates tend to be higher. More people buy and invest, and most consumers don’t need an incentive to continue spending.
When the economy is performing poorly, interest rates are lowered to encourage spending. Because consumers don’t spend as much when the economy is in a recession, they need an extra push. With lower interest rates, consumers have an incentive to purchase more, even if unemployment is up and production of goods is down.
The lower rates give home buyers an incentive to purchase a home and give homeowners an incentive to refinance.
There are many factors influencing interest rates, so they don’t always go down during a recession or up during an expansion. For example, interest rates lowered after the U.K.’s referendum vote to leave the European Union, but the economy was (and still is) in an expansion.
What Does This Mean for You?
We know for sure that the business cycle repeats itself, but we don’t know the length or intensity of each period. That’s why we’re always hearing, “we’re heading toward a recession” or “we can only go up from here!” Economists have an idea of where the economy is going, but as history has shown us, they don’t know for sure.
Currently, the markets are doing well. Our economy is growing, employment is up and interest rates are near historic lows. Take advantage of the good times by treating yourself, but continuing to add to your 401(k) and emergency fund. You should enjoy the economic prosperity today but prepare for the day the economy isn’t growing as fast. When a contraction begins, don’t panic. The stock market may take a hit, but it will go back up. Your 401(k), the stock market and the housing market will recover in due time.
With interest rates low, now is a great time to purchase a home. Owning is a great investment, and buying may be less expensive than renting. With increased home values and lower interest rates, this may be a good time to sell and perhaps even upgrade if you are already a homeowner. Visit QuickenLoans.com or speak with a Home Loan Expert to discuss your loan options today.
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