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02/07/2012 15:48:00 PM

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Market Conditions

The price you pay for your home will be affected by prevailing economic (market) conditions. Changes in market conditions can have an immediate and significant effect on property values. For this reason, it's important to be aware of current conditions.

The price of real estate is affected by the supply and demand for credit and real property. The supply of capital is finite. Capital available for lending is shared among government, business, consumer, mortgage and other borrowers. If capital is in relatively short supply, the cost of capital rises. When capital is in relatively great supply, the cost of capital declines.

The supply of money and credit in the economy is regulated by the Federal Reserve Bank. If The Fed makes too little credit available, demand for money can cause interest rates to increase. Borrowing, investing and sales decrease as interest rates rise, which can lead to an economic decline. Alternatively, if there is too much available credit, interest rates can fall. When interest rates are low, price levels for goods and services can increase as people are willing to pay more and more for them, which can potentially lead to inflation. It's The Fed's job to use monetary policy to achieve a growing yet stable economy.

The price you pay for your home can be affected by interest rate levels. Interest rates can change relatively quickly. Conversely, the supply of housing changes slowly. In the short run, the housing supply can be considered fixed.

Consider what can happen in the housing market when interest rates are relatively low. Low interest rates allow a larger number of home buyers (borrowers) to enter the housing market. More buyers competing for a fixed supply of housing can cause the price of housing to increase. This type of market is sometimes referred to as a seller's market . In a seller's market, properties sell quickly, multiple offers are common and property values may be increasing. When interest rates rise, many would-be buyers no longer qualify for mortgages and leave the housing market. This type of market is referred to as a buyer's market. In a buyer's market, property values may be level or decreasing as sellers compete to attract buyers.

As a home buyer, your buying behavior can be influenced by market conditions. If you're in a seller's market, you may feel pressure to act quickly and offer top-dollar for a property. In a buyer's market, you may feel less hurried, more in control of the situation and inclined to offer relatively less for a home.