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Factors that Influence the Price Declines in Residential Real Estate Markets

Published by Lawrence Roberts | December 26th 2008 | Views:

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There are a number of factors that will influence the timing and the depth of the price decline. There are a number of psychological factors and technical factors in play. These include:

* Smaller Debt-to-Income Ratios
* Increasing Interest Rates and Tightening Credit
* Higher Unemployment
* Foreclosures
* Decrease in Ownership Rates
* Government Intervention

Smaller debt-to-income ratios impact the market because buyers tend to put a smaller percentage of income toward housing payments during price declines. Increasing interest rates decrease the amount borrowers can finance and use to bid on real estate, and tightening credit decreases the size of the borrower pool and thereby lowers demand. A deteriorating economy and higher rates of unemployment means there are fewer buyers with the income to purchase homes, and more homeowners are put in financial distress. High rates of financial distress caused by unemployment or the resetting of adjustable rate mortgages in a higher interest rate environment leads to more foreclosures. Large numbers of foreclosures adds to market inventories and works to push prices lower. The ultimate unknown factor is the meddling of the US Government in the financial markets. A bailout program for homeowners or lenders could radically alter the course of price movement.

Most of the risks to the housing market are to the downside.
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