How Financing Affects
the Real Estate Market
Most people do not have cash on hand to buy a home which means they will borrow the money or finance the purchase. Financing affects the Real Estate Market by allowing people to buy a home when they normally could not. Even people who have the cash to buy a home will use financing to make their own money go farther. When real estate investors, real estate is an investment even for first-time home buyers, try to get a mortgage the down payment and interest rates are the main factors which will make a home purchase affordable.
Since people need a place to live they will either rent or buy a home, so demand for housing is always high. Rental prices and mortgage payments are usually close. If a person wants to own a home then its just a matter of getting money together for a down payment. Deciding if one should buy or rent is a process of determining ones finances and ones plans for the future.
Many people save up for a down payment but this isn't always necessary. Depending on ones situation there are programs form non-profits, gov agencies which help with down payments. Using ones own assets, 401k, selling items, investments etc. or receiving a gift or borrowing from a family member are possibilities. There was a time when some lenders would let a person borrow money for the down payment but that is almost non-existent with the new lending rules implemented in 2014. For investors that want to buy and sell a home quickly for profit (flip) there are hard money lenders, or private investors who will finance a home. These hard money lenders usually expect a lower down payment but charge a higher interest rate. Hard money lenders are more interested in the value of the home after it is repaired which enables an investor to buy a home fix it up for a quick resale. Credit ratings may make it difficult to get a home loan but credit ratings can be improved upon on over time. Don't delay in planning for a home, keeping an eye on ones finances and credit score are a must for buying a home. Weather you are looking to buy a home to live in for many years or use it as an investment, financing a home comes down to the 5 C's of borrowing: Credit Score, Collateral, Capacity, Capital and Conditions.
As housing prices fluctuate with supply and demand, it is really a buyers ability to get financing that creates demand. As interest rates increase there is a point where the majority of people will not be able to purchase a home so demand will drop. The following picture shows how purchasing power decreases as interest rates go up.
(add affordability purchasing power pictures form Jan 2014 KCM)
Depending on how the economy is going, makes it easier or more difficult to get a home. Either way it is important to think about ones financial future and plan accordingly for boom or bust. Financing affects the real estate market by affordability which affects demand.