The Relationship between Economy and Housing Market

There is no doubt that the housing market is affected by the prevailing economy. When the economy is thriving, the housing market often sees a robust growth and prices begin to rise high. And, when the economy is not doing well a slump is noticed in the housing market. While this is a foregone conclusion, what many people forget is that the housing market also has an impact on the economy.

Housing Market Affect the Economy

Effects of Economy on Housing Market

The housing market begins with housing starts, which refers to the number of new residential projects in a specific month. When the economy is flourishing, people are more conducive to buying new homes. On the other hand, when the economy is not faring well, the likelihood of people buying new homes diminishes. Housing starts are good indicators of the economy and tend to have an impact on markets related to the housing market, such as mortgages, sale of land, raw materials and employment.

Sales of homes are directly associated with the health of the economy. Any rise or fall in the economy has an impact on home sales. When there is a downturn in the economy, people are worried about their jobs and tend to be more careful about spending their money. Furthermore, when the economy slows down, getting loans and mortgages are more difficult. This result in a higher inventory of homes and hence selling homes takes longer. When the number of homes in the market increases, it causes the prices of homes to drop.

Most homeowners need mortgages and loans to buy their homes. Getting mortgages and loans is directly related to the health of the economy. If the economy is not doing well, people find it difficult to get loans and mortgages. This has an effect on the housing market, as sales will slow down. On the other hand, when people can get loans and mortgages easily in a thriving economy, the demand is higher than the supply. As a result, number of homes for sale reduces and this drives up the price until the market crashes or the market is corrected.

Effects of Housing Market on the Economy

Home sales affect local economies, and the effect of home sales on the economies is deeper and longer lasting. People, who are directly involved in the real estate market, are naturally affected by the trends noticed in home sales. These include lenders, developers, construction workers, realtors and builders. But there are allied workers who get affected by home sales. These include manufacturers and sellers of furniture and appliances, home improvement stores, landscapers, carpet sellers, plumbers, electricians and lawn service technicians. These companies and professionals are dependent on the housing market and if it slumps, it has an impact on their livelihood. If the housing market fares well, it has a positive effect on these suppliers and manufacturers.

The number of homes available on the market also has impact on the local economy. The types of homes, locations and prices can have an effect on the decision of large and medium-sized businesses to relocate and provide employment within the local community. If there is a wide choice in the types of homes and they are located in good neighborhoods, there is a high possibility of corporations relocating, as their highly paid employees will be able to find homes to suit their taste and budget.

Home sales also have an effect on the services provided by the local government. The property taxes collected are utilized for providing and improving services, such as road maintenance, recreation, law enforcement, transportation and fire department. If the number of home sales increases, the quality of local government services also improves and better facilities are available for taxpayers.

Hence, housing market and economy are intricately linked, with one having an impact on the other. If one does well, the chances of the other doing well are very high and should not be taken as a coincidence.

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  • Rosemary says:

    Jun 7, 2013 at 12:44 pm

    Excellent article – The housing market is so important and was the cause of such low unemployment back in 2005. It is now one of the main industries in this country. Without a housing recovery, the entire economy on a national and local level will suffer.


  • Kimberly Davis says:

    Jun 12, 2013 at 9:36 am

    Straight-forward article, and easy to understand. Really enjoyed reading it!


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