If you're thinking about buying or selling real estate in Massachusetts, I know that one of the most common questions I get is, "How's the market?". It is, for the most part, just friendly conversation from a non agent to an agent, but it most people really don't think about it much. They read what's available in the newspaper or on-line, which is very likely National numbers, or, if they are extremely diligent, statewide numbers.
However, if you're a regular reader of the blog, you know that there are many variations from town to town, in terms of momentum, inventory, prices, etc. Certainly, even in certain down cycles there are up points, and in up cycles there are down trends - things rarely happen in a straight line. And part of that is because there are a number of factors that affect "The Market" and they are all pulling and pushing each other around. They have different impacts at different times, but I thought I would look at Rates in this post, and talk about how they affect the market, both in the immediate term and the short-term.
In the all simplistic world, falling rates generally mean that housing gets cheaper. If you're paying the same price, but your interest is less, than you're total cost for purchasing a house goes down. This basic fact has driven real estate cycles in this country for a long time - generations - and rates are certainly a major factor in every market. If rates fall far enough, for long enough, more buyers will enter the market, and transaction volume will increase. Further, the longer this trend goes, prices will go up (since the supply is much more static - or unchanging - than the demand). Eventually, the rising prices will offset the lower rates, and the market will stabilize (or retract).
That's in the long term. In the short term, rate lowering will increase traffic, but not necessarily sales. If the buyers anticipate that the rates are falling and will continue to fall, they will hold off on their purchase. Only when confronted with the fact that rates have bottomed (and by this we mean go up a bit from the bottom!) will much of those lookers be converted to buyers. Many markets are driven by this large scale game of musical chairs, and real estate is not different.
Of course, these affects are much more pronounced when the factors themselves are. The market existed in a state where rates were low - in the 5's, and high 4's - for almost 5 years. The rates went up to the mid-sixes and I think may have touched 7 at some point, but that was for a short period of time, and now they are back in the fours. Rates are definitely cheaper today than they were for the "boom" period of the last up-cycle, but not so much that it has really boosted transaction volume. The effects would likely be more noticeable if the country was not de-leveraging, but that is a post for another time.
Please ask any questions that might help clarify this article in the comments.