Eco/372 - Product Purchases and the Economy

Product Purchases and the Economy

Esther L. Taylor

ECO/372

April 11, 2016

Mr. Juan Carlos Ginarte

Product Purchases and the Economy

Home ownership is often cited as a key component in the fabled formula for realizing the American dream. Not unlike early settlers who planted their flags in the ground in order to claim a piece of land as their own, to many Americans purchasing a home symbolizes a certain financial success and independence. However, in the wake of major disruptions to the U.S. housing market following the financial crisis of 2008, the overall rate of homeownership has been in decline as, to many, buying a house now seems to be an incredibly daunting prospect. This albeit warranted trepidation has encouraged some home buyers to look beyond basic housing market statistics and to research and examine various economic indicators such as interest rates and unemployment rates when considering making a purchase of this magnitude.

Existing Home Sales

Generally speaking, home sales are directly tied to the health of an economy, rising and falling within the cycle of economic activity. As an economy contracts, the supply of money tends to become more restrictive. These restrictions make it much more difficult for the average consumer to borrow money thus leading to a reduced amount of potential buyers entering the housing market. When strict lending requirements lessen the pool of available buyers in the housing market, home inventories typically go up and often take much longer to sell. This increased supply of the product combined with a diminished demand for the product generally forces home prices down. Conversely, if money is too easy to borrow, the housing market runs the risk of becoming flooded with buyers, driving up home prices until the market inevitably corrects itself, or worse, crashes, as it did just a few years ago in 2007.

Ideally, the housing market should align with economic activity, but occasionally that is not the case. Therefore, in addition to monitoring reported fluctuations in home purchases and sales, prospective homebuyers should also consider other economic indicators in an effort to obtain the most comprehensive understanding of the overall strength of the economy.

Interest and Unemployment Rates

        According to Douglas M. McCoy, Director of the Benecki Center for Real Estate Studies at the Kelley School of Business at Indiana University, low unemployment and favorable interest rates are two of the primary drivers that usher potential homebuyers into the housing market (McCoy, 2015). The unemployment rate as defined by the Internet Center for Management and Business Administration on QuickMBA.com is the percentage of the country’s labor force that does not currently hold a job but is actively seeking employment (2010). The interest rate is defined as the amount charged, typically at an annual rate, for the use of money, i.e., bills, notes, bonds, credit cards, and many kinds of consumer and business loans (Downes & Goodman, 2014).