Buying and selling property is a big event for those gaining the asset and for those making money on the deal. Yet it is another day at the office for realtors, lenders, attorneys and title agencies. Still, the way these transactions go down goes well beyond the immediate participants. An array of factors influences the home value, mortgage interest rate, fees and timing of these exchanges. Such variables can occur at the site of the subject property -- or halfway around the world. In this post, we talk about how issues near and far play a role in home sales.
The nutshell definition of inflation is the decreasing purchasing capacity of money. Due to this decline, products and services demand more money in exchange so everything becomes more expensive. Food staples like milk and eggs; fuel and energy forms; health care delivery; and virtually every other consumer product see a rise in their respective costs. Remember, prices go up when more dollars circulate without a corresponding increase in goods. Given the fact that the available inventory of houses is relatively modest -- and has been for a number of years -- it is little surprise that overall home value inches up.
Related to price inflation is the matter of interest rates, i.e., the cost of borrowing and the dividend from saving money. The Federal Reserve Board of Governors ("the Fed") -- basically the central banking authority in the U.S. -- lifts key rates for banks to borrow funds in order to make borrowing more costly to consumers and businesses. The intended effect here is to curtail economic activity just enough to take dollars out of circulation so inflation will abate. The problem for property sellers is that their sale might be a casualty of this tightening. Similarly, higher rates might price some purchasers out of receiving mortgage loans.
Strictly defined, a recession is two consecutive quarters (three months each) of negative gross domestic product, i.e., the collective monetary value of all the services and products generated in the U.S. Effectively, a recession is a decline in economic activity that is widespread, extended and critical. In brief, recessions result in significant contraction of the workforce -- job losses are common during these downturns. Such a development takes a large portion of the potential home buyer population out of play. Without the intense competition, sellers have to be more flexible in pricing.
Political decisions have a bearing on economic conditions and financial prospects. The members of the Fed are all political appointees, and often reflect a particular monetary philosophy held by the party in power at the time of their appointment. How the "central bank" responds to inflation, recessions, credit crunches and other events is based, at least in part, on the way each Fed governor interprets economic indicators. Regulation, too, by legislators and administrative agencies affects the cost of doing business for realtors, lenders, lawyers and others involved in property conveyance.
Foreign governments can also act in ways that stimulate or depress the real estate markets. As is demonstrated above, the real estate market is not divorced from the overall economy. When energy prices soar, other sectors respond. Those countries rich in oil and other resources have a say over how expensive energy is for Americans. Wars can cut off access to other vital resources; this can likewise drive up prices. Hence, the cost of living determines how many people can afford to purchase houses and pay down home loans.