The recent housing market slump in the United States has affected many areas of the consumer and financial markets.  The cyclical movement in the last decade within the housing markets has been very indicative of the psychological market factors influenced by supply and demand.

During the housing boom in the early part of the 21st century, many investors and home buyers were bidding up the value of homes, especially in developing metropolitan markets.  Eventually, as prices reached their peak, many aspiring buyers were priced out of the market and decided either not to buy, or to look for other options, including rentals.  As demand for new and resale homes flattened and growth began to decline, panicked or overpriced sellers began to reduce prices and concern grew for the marketability of homes.

As US and other global housing markets near bottom, many aggressive investors who were stuck with overpriced homes have pulled back on investments, and are hoping for growth in the market to create returns on their existing properties.  More cautious investors who didn’t jump in at the high points are now looking to find potentially undervalued properties on the premise of buying “low,” and eventually, selling “high.”  Many are buying formerly undesirable homes and fixing them with the hope of great return once the market picks back up. 

Those conservative investors, along with thrifty home buyers, will help establish the base of the housing market.  According to the National Association of Realtors (NAR), 40% of home buys were from investors or second home buyers, in 2005.  This number should be significantly reduced in 2006 as some investors wait.  Eventually, once the market bounces off the bottom and the pendulum swings, patient home buyers will come in behind the early investors and other buyers, and momentum will begin to grow. 

While these psychological factors certainly play a big role in the housing market developments, other factors are involved.  Financing options and flexibility have impacted the housing market.  Development and growth in sub-prime mortgages, low interest rates, and 40 to 50 year loan payment plans helped drive the rapid overvaluing of homes in big markets.

Interestingly, while the US Government is considering options to bail out struggling sub-prime debtors, low interest rates are once again getting lower, due to recent cuts by the Federal Reserve, which may also be a catalyst for the regeneration of home buying.  The question is, will the home market base and grow at a steady and healthy rate in the coming years, or will it bounce off lows, and see the same hyper growth that lead to the current market’s problems?

Drastic growth in new home building during the housing boom also lead to an oversupply of homes in the market.  Many bigger housing markets are now hoping that population and jobs growth can catch up with new housing developed in recent years.  According to the (NAR), sales of existing homes dropped at their fastest rate in nearly twenty years during 2006.  They are calling for only a moderate drop (around one percent) in growth for the current year, which hints at a potential basing of the market and opportunity for stabilization.  Quantities of unsold homes on the market are being reduced as well.

The good news for home buyers is that there may never be another time as opportune to get a good deal on a family home in many markets.  As home prices have flattened and dropped in some areas with the slump, interest rates have begun to drop again to historic lows, with the Fed cuts.  This means prospective buyers can get in at reasonable market prices, with stable loans, that are affordable.  If the market is basing, there is great growth potential for equity growth and future resale.

The challenge for many potential buyers is that in order to buy a new home, they must resell their existing homes, and bear the brunt of the buyer’s market from the selling side.  Additionally, some home owners are struggling with Adjustable Rate Mortgages (ARMs) or “balloon payments” that currently have higher interest rate levels than the conventional loan markets.  First time home buyers, current renters, and those moving from higher valued to under valued markets can benefit the most by buying in the current market, if it has, in fact, hit bottom.

Market Recap

US equity markets got off to a slow start in the new trading month and week with the Dow, NASDAQ, and S & P all experiencing moderate losses Monday and Tuesday.  The Dow dropped roughly one percent over the two trading days following a strong surge in the last trading week of November.  US car manufacturer, Ford, along with Japan’s Toyota reported flat November sales, while GM was down.  The overall results for the embattled car makers were mixed, as newer and more fuel-efficient models performed well with high gas prices apparently affecting consumers.  Tuesday’s slight loss in the indexes seemingly resulted from a battle between the still present sub-prime mortgage concerns and upbeat outlooks from some corporate retailers.  Some financial experts are suggesting that the slight pullback following last week’s big move may be a sign that the stock market is stabilizing and is ready to move forward again.

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

Please note:  The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments.  Actions taken on the basis of the information shared is at the sole risk and discretion of the individual.