How the Housing Market Affects Individual Homeowners

As goes the Louisville housing market, so goes household finances. At least, that's the way it is for homeowners. For most homeowners, their house is a primary component and the single greatest ticket item in their financial portfolio. As such, their level of wealth fluctuates with the ever-changing price of housing.

When housing costs are stable and trending upward, the equity in houses increases, as was the case during the housing boom from 1995 through 2006. When this happens, homeowners gain wealth, are able to borrow against the increased value (through an equity withdrawal), and experience greater freedom to spend and invest.

When housing costs recede, however, the equity decreases as wealth disappears. If home values plummet dramatically—as occurred when the housing bubble burst in October of 2007—it is possible for a homeowner to find himself or herself in a negative equity position with a mortgage that exceeds the value of the home. In such a case, the homeowner may decide to simply walk away and allow the creditor—usually a bank—to foreclose on the house.

Additionally, due to the interconnectivity of the economy, the price of housing impacts the cost of other goods, the value of currency, the rate of inflation, interest rates, and the overall economic health of the nation. Indeed, fluctuations in one market can have ramifications around the world. These are not merely issues for accountants; they can greatly affect the household expenses for virtually every member of society.

For those seeking to purchase a home in a volatile housing market, they may have difficulty acquiring the necessary financing. Even though the cost of a home may be relatively low (adding to the loss of the current owner), potential creditors may demand a pristine credit rating before agreeing to loan money. Ultimately, a poor housing market can negatively affect homeowners and buyers alike.

The good news is that the economy tends to be cyclical. What goes around comes around. The housing market has always endured ebbs and flows, so it is inevitable that poor market conditions will improve over time. By budgeting wisely, living within self-imposed margins, and taking the necessary steps to endure an economic downturn, it is possible to emerge safely on the other side.