7 Tips for Home Buyers: How to Read Housing Market News
By Tait Militana
March 11, 2019
Home buying is difficult because the market is always changing. What applies one day may not apply the next. Housing prices fluctuate. The best home buyers anticipate market changes and choose the optimal time to buy. Luckily, you do not need to be a financial analyst to succeed in the market – simply knowing how to read the news is enough. The news is full of facts and figures that can inform your understanding of how housing prices move. In this guide, we will show you a few of the most important tips for home buyers reading the news.
1. Interest Rates
The Federal Reserve is charged with enacting the monetary policy of the United States. Its most-watched policy tool is the federal funds rate. This is the interest rate banks charge one another to borrow funds overnight. The Fed does not set this rate directly. Instead, it engages in the buying and selling of securities to guide it to the level it seeks.
Home buyers watch this rate because it affects the cost of borrowing. Any increase in the cost of borrowing for a bank is passed on to customers in the form of higher interest rates on loans, credit cards and mortgages.
When reading the news about a federal funds rate change, the most important information to look for is the direction of the change and its pace. If the Fed signals that it expects to raise rates two times instead of three over the next year, home buyers can take away that mortgages are going to get more expensive, but maybe not as fast as expected. This is, in fact, exactly what the Fed said after its December 2018 meeting. The 2019 real estate market preview outlines the effect of rising interest rates and includes more tips for home buyers.
Wages affect home prices because as wages increase, more people can afford to purchase a home. This increases demand and puts upward pressure on home prices. As a homeowner reading the news, there are a few things to look for concerning wages.
The first is the general state of wages. The Bureau of Labor Statistics releases a quarterly report on compensation costs, which includes the percentage change in worker wages, bonuses and benefits. News coverage of this report often includes headlines like “US Wages Rise in Fourth Quarter” or “Worker Pay Rate Hits Highest Level In a Decade.”
These articles give a high-level overview of wages nationwide and can help home buyers understand broad trends in wage growth. But real estate is a local industry, so it is also important for homebuyers to keep track of news in their neighborhood. The announcement of a new business bringing high wage jobs can have upward effects on local home prices even as national wages are flat. This is why so much discussion about Amazon’s 2018 HQ2 announcement centered on real estate and housing prices.
Unemployment is closely related to wages. It provides a general measure of the state of the economy and can also exhibit localized differences. You are likely familiar with the monthly “jobs report.” Released by BLS on the first Friday of each month, this report tells us how many jobs the economy added over the past thirty days. It fuels headlines like “US Employers Add 304,000 Jobs in January as Unemployment Rate Ticks Up to 4%.”
A homebuyer reading this headline could take away that the employment situation in the U.S. is strong. Even a small increase in the unemployment rate to 4 percent would be considered normal for this pace of hiring. Low unemployment would increase demand for homes as workers are more confident in their long-term job prospects and more comfortable taking on debt.
But just like with wages, the national figures do not tell the whole story. Homebuyers should also read the news for local changes in unemployment. Closing businesses in the community could signal a downshift in the local housing market that is independent of broader trends.
Inflation is an increase in the cost of goods and services for consumers. Usually, it is measured in percentage change (e.g. 1.6% per year). Most news about inflation will come from the Federal Reserve and the Labor Department. The Federal Reserve is charged with maintaining stable prices, so in explaining their decisions on interest rates, Fed officials often provide forecasts for inflation. For its part, the Labor Department releases a monthly Consumer Price Index report, which tracks the change in prices paid for a standard basket of goods.
Inflation affects housing prices because it affects prices generally. If the goods that make up a house cost more, the house itself will cost more. As prices rise, an individual’s wage income is worthless. Therefore, inflation can affect the ability to afford a home.
Tips for home buyers reading news about inflation: Keep in mind that the Fed has set a long-term inflation target of 2 percent per year. The Fed considers rates below this target suboptimal due to the risk of deflation. Rates above this target risk eroding consumer purchasing power.
Homebuyers also should read the news for signs of investment in their community. City or state infrastructure initiatives can improve a neighborhood and make it a more desirable place to live.
Of course, most infrastructure projects are planned several years in advance. Savvy homebuyers will keep track of news during the planning stages and make purchasing decisions well before a shovel hits the ground.
Taxes affect the housing market in a myriad of ways. Two of the most important for homebuyers are deductions for state and local property taxes and tax credits for home purchases.
Many states and municipal governments assess taxes on the property you own. The federal government has long said that you can deduct the taxes you pay to local authorities on your federal tax return. This lowers your taxable income resulting in a smaller tax bill to the federal government.
News of any changes in these deductions or others should be of interest to homebuyers because they affect how attractive homeownership is as a financial decision. For example, the 2017 Tax Cut and Job Act capped at $10,000 the amount of local and state taxes that can be deducted from income.
Unlike deductions, which target taxable income, tax credits directly reduce the amount of taxes owed. The federal government has, at times, provided tax credits for first-time homebuyers. The latest example was between the years 2008 and 2010 as a way to stimulate demand during the recovery from the great recession.
The cost of maintaining a home also affects the housing market. Because home heating (and cooling) makes up a significant portion of these costs, homebuyers should be aware of news on energy prices.
According to the Energy Information Administration, household energy bills make up between 3 percent and 6 percent of total expenditures. The most common heat sources are propane, heating oil, natural gas and electricity. Any price increases in these fuels would make homeownership more expensive.
Of course, there are many other facts and figures that affect the housing market. But with these seven tips for home buyers, you should be equipped to read the news with a fresh set of eyes.
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