Maximizing Savings on Your New Home

Welcome to Saving Thousands with Robert Palmer. Shopping for a new home doesn't have to be an ordeal. In the next half hour, you'll hear practical advice on how to maximize your savings on a new home. We'll help you take the guesswork out of home prices and mortgage interest rates plus introduce you to a great, low cost loan option. And now, here's Robert Palmer.

Let's talk about what makes home prices go up and down in value. For comparison, stocks go up in value when a company makes profits or shows the potential to make profits, increasing the demand for that stock. Home prices increase in value for two different reasons, inflation and demand.

Inflation is the gradual increase in cost over time. And demand is based on the location of the home and the desire for people to live there. Supply and demand are basic principles in economics. When there's a high demand and a limited supply, prices will increase. When there's too much supply available and not enough demand, prices will reduce to try to entice more demand.

Excess demand will increase prices, while excess supply will reduce prices. Therefore, they move inversely. We can look at supply and demand in real estate on a very small level and then expand these principles to larger areas.

Let's say there's a hypothetical neighborhood with just 100 homes in it. And there are usually five buyers per year that want to move into this neighborhood, and five people who wish to sell. In this case, supply and demand are balanced. So there's very little appreciation and very little increase on prices.

Suddenly, a new road goes in, making this neighborhood very convenient to the downtown area where many people work. For this reason, instead of five people wanting to buy here per year, now, all of a sudden, 100 people want to. But remember, there are only five houses for sale per year. And now all of the sudden there are 100 buyers competing for these same five homes.

The supply is still at five. But the demand has grown substantially higher. With 100 people battling to own only five homes, prices will increase rapidly as they attempt to outbid each other and get the homes.High demand and low or static supply results in an increase in appreciation in home prices. As the prices begin to increase, other people will start to sell to take advantage of the new, higher prices. For some people, being close to downtown is not as important. So they'll sell their home in this neighborhood at the new, higher price and move to another neighborhood that is not in such demand.

This will increase the supply. And as more people are willing to sell their homes at the new higher prices, things will come into balance.

Now, the supply will increase as more and more homes go up for sale. So in our example, we'll say that there are now 50 homes for sale. As the supply increases to meet the demand, the prices will start to level out. Finally, the prices will be at a point that outweighs the benefit of being close to downtown. When this happens, the buyers will move on to other areas, reducing the demand. Prices will level out at this point. And supply and demand will meet and return to normal levels of home appreciation.

The reduction in demand caused by potential buyers being discouraged by price will ultimately cause prices to stop increasing or even start to fall. This is the supply and demand cycle. This cycle is much different for real estate than it is for other goods. If there was a product that suddenly came in demand, the manufacturer could simply make more of it and meet the demand. Or a competitor would begin to produce a product to meet the demand, as well.

In our example above, though, there were only 100 homes in the neighborhood that was all of a sudden in demand. No one can create new homes in this neighborhood. So the only way to create more supply is for more people to sell. And the only way to motivate more people to sell is to increase prices.

The longer the existing owners refuse to sell in an area, the faster the prices will increase, and the longer the increasing trend will last. The market will continue to increase in price until they reach a point that motivates the existing owners to sell or the price outweighs the benefit of buyers being in that location. This supply and demand imbalance can be applied on a larger scale to the areas that had high amounts of depreciation during the real estate boom.

Due to low interest rates and our aging population, many people began buying homes in desirable areas such as Arizona, Nevada, and Florida, the areas that got hit the most when the bubble burst. As the demand increased, the supply remained the same for a while. As prices increased, some owners decided to sell their homes at the new, higher prices, claim their profit, and move to other states. The areas that experienced the growth had large amounts of vacant land, which would allow more supply to be created.

When we're talking about a neighborhood with a fixed amount of homes for sale, supply was easy to track. But when we look at a larger scale area with the option to create new homes, things get a little more complicated. The development and construction industries can take around 18 months to add substantial amounts of new inventory to an area. When the demand for these areas suddenly increased and the development and building community started large-scale attempts to add new supply to the market, well, for the first 18 months, they had no effect on supply because of the time it takes to develop and build new homes.

During this time, the only way to meet the demand was to increase prices to motivate existing owners to leave. This 18 month period was an appreciation spike seeing rates as high as 30%. It took a 30% price increase in some areas to motivate enough existing owners to sell. They had to be motivated to sell and meet the demand imbalance in the markets.

This caused prices to spiral out of control. And unfortunately, much of this demand was artificially created by mortgage products that allowed home buyers to purchase homes they simply could not afford. These subprime loans granted access to housing with no regard for income qualifications. And many used temporary, low, teaser payments to give home buyers the misconception that they could afford the home.

The mortgage industry was running like a huge Ponzi scheme. And eventually these risky products came to an end. The only way they could prevent mass defaults on mortgages was to come up with even more risky loans to allow new home buyers to purchase the old homes from the last batch of risky buyers. This continued loosening of lending guidelines kept increasing demand and hiding the problems created by the previous set of risky loans.

Eventually, the mortgage industry ran out of ways to loosen guidelines and create more artificial demand. And the housing market came crashing down.

The housing market will recover over time because eventually, supply will catch up with demand. As I explained before, as the imbalance of supply and demand finally work out, we will see home prices start to increase again. I think we're starting to see a little bit of that now. Home builders have been building less. And new home buyers have been starting to soak up some of the existing inventory.

So to learn more about how home values fluctuate and are set, visit savingthousands.com and enter keywords home appreciation. And remember, you can always join the conversation at the Saving Thousands forums online where you can ask questions and get answers anytime, day or night.

How does 100% financing and no down payment sound? Later in the program, Robert explains how you could qualify for a low-cost USDA loan. But next, find out what makes financing a home in Florida such a great bargain when it comes to mortgage rates. We'll be right back.