Almost 2,000 years ago, the Roman philosopher Pliny the Elder stated, “Home is where the heart is.” In this simple statement, Pliny summed up the emotions we attach to the physical structure. When we attach emotions, the house transcends its physical form and becomes a place of love, happiness, and security. It becomes more than just a building. It becomes a home.
The concept of home is central to nearly all cultures, but while it is essentially an emotional concept, there is also a financial component. Indeed, the bottom line is that a home represents a financial asset as much as it represents an emotional concept.
When purchasing a home, many financial aspects come into play. This article will identify and detail some of the most important financial factors affecting new home buyers.
Market Size
The importance of real estate from a financial perspective is emphasized when we look at the statistics. Real estate is one of the most significant components of the global economy. In 2020, the international housing market amounted to $2687.35 Billion, and by the end of 2025, this figure is expected to reach $3717.03 Billion.
In 2020, the American real estate market was valued at $461.7 billion. The housing market was worth $36.2 Billion, which represented a gain of $2.5 Billion from 2019. During the same period, the American housing market was composed of 140.8 million housing units and 820,000 new house sales.
Financial Factors
Location, location, location — this is the mantra of real estate agents, and it stresses the influence of location on the value of the real estate. From the home buyer’s perspective, this means location is an essential factor in determining the price.
In most cases, location is directly proportional to price. The better the site is, the higher the price will be, and vice versa. A wide variety of factors can determine whether a particular location is better (or more desirable), but analysts traditionally only cite five. These are centrality, neighborhood, development, lot location, and lot size.
Interest Rates
For most people, buying a house will necessitate taking out a mortgage loan, which is directly affected by interest rates. The relationship between mortgage loans and interest rates is inversely proportional. The higher the interest rate, the lower the number of mortgages, and the lower the interest rate, the higher the mortgages.
Changes in interest rates directly influence a person’s ability to purchase a house. Lower interest rates lead to increased numbers of mortgage loans. The greater number of mortgage loans is interpreted as higher demand, which, in turn, leads to higher prices and a corresponding drop in mortgage loans.
Home Loans
Buying a house is probably the most significant and most complicated investment that people will make in their entire lifetime. For most people, purchasing a home will mean taking out a loan, which is a mortgage loan.
The most popular mortgage loan is the Federal Housing Administration (FHA) loan. This loan is designed for lower to middle-income earners and features a lower down payment, and requires a lower credit score.
Many other organizations offer a home mortgage loan, and these include commercial banks, savings and loan associations, credit unions, and private mortgage companies. Each of these lenders has certain advantages. In the case of a private mortgage company, these advantages include national and local knowledge in addition to personalized and professional service. Private mortgage companies will often employ experienced loan consultants who can not only guide you through the various options but even design a loan tailored specifically to your needs.
Government Policies and Subsidies
Through legislation, the government can influence property demand and prices. Governments can legislate tax credits, deductions, and subsidies, all of which have the effect of significantly increasing demand.
Being aware of current government incentives is vital for both buyers and sellers. From the buyer’s perspective, awareness of legislative changes means taking advantage of better financial conditions when making a purchase. From the seller’s perspective, understanding legislative changes can help predict changes in supply and demand and identify trends.
Purchasing a new home is a big step for just about anybody, and while it is an emotional decision, it is also a financial decision. In fact, it is probably the most crucial financial decision buyers will ever make. Considering the amount of effort and time needed to afford one, it becomes a worthy investment. Given the importance of this decision, buyers, especially first-time ones, must be informed of the various financial factors that can make or break the dream of owning a home. This way, they won’t experience any issues in the long run.
