For those who own a property, should be aware of its value at all times and keep up with the market price frequently. There are few things like natural calamities, which can affect the property prices. Here we will discuss the causes that are responsible for the decline in property prices. Before that, it’s important to know what property price mean actually. Property price is similar to any kind of economic value having a mechanism where there’s a role of demand and supply. When there’s low supply but a high demand in the market the value automatically increases, and it’s of no exception in case of the property market. But first, there should be a look out at the economy.
Thus, economic changes within the market cause the downturn. This downturn could be of local or might be even global. When an economy is affected and unemployment rises, some people actually tend to lose jobs, and that affects the payment in the mortgage, and with time it becomes harder to overcome that debt, ending up being forced to sell the property. Thus people who have no jobs look forward to sell their property. But that even brings a change in the supply side making the property price fall due to increased supply and reduction in demand. This up and down in the demand and supply in the market makes people less confident to buy that. Thus people who are willing to sell their property sell at a lower price due to the market structure.
The Rise in Mortgage Rates
The economy gives rise to jobs, and with those jobs, one can earn an income. When one gets the income they can go to the banks or to the mortgage brokers to borrow some money. This ultimately gives rise to the demand in the market, and on the supply side, the developers, the builders, the individuals are the ones to provide the stock to the market. When they tend to see that the economy looks good and a lot of people want to buy their product, they plan for making more sales.
At the lower rate of interest, buyers are able to spend more on a house and the monthly payment for a mortgage will be lower. As this rate of interest increases, the affordability for the home decrease for all the active buyers. They fail to spend much in contrast to the initial purchase price due to increased interest rates. Thus, their monthly payments for mortgage tend to be higher and they seem to have spent more over the life of their loan. A rise in mortgage rate not only affect the property buyers but also the sellers as well. Before the rise in interest rate, the property may fall under the price range of 30 potential buyers, but with higher rates, this number of buyers may drop down to only ten prospective buyers. Then sellers may have to drop their price list to drag more buyers.
Short Sales or Foreclosures
Another menace to the property value is the short sales or foreclosures within the neighborhood. This ultimately affects the value of the property by distorting the comparable sales in the neighborhood. Having short sales and specifically, foreclosure on the respective owner’s street makes their home value to drop. When a neighborhood faces a lot of short sales, the active buyers may hesitate to buy as they aren’t sure of its stability or the future value of their property. Of course, no one will wish to buy a property that has witnessed a foreclosure next to it. Or even if one is willing to buy then they will simply come into negotiations for a drop in the price to buy.
There’s nothing one can do where Mother Nature itself becomes the reason for the decrease in the property value. Natural disasters sometimes clear away entire communities. For instance, the Katrina Hurricane stroked the Gulf Coast back in 2005 leaving almost 2000 people dead and over $81 billion damage to property. Such Natural disaster occurs without any warning and can totally devastate an entire area. Natural disaster damages the existing property. If one has insurance they will certainly get some money for paying off the damage, but that’s a rare case. Weather patterns change over time and so at the time of purchase one may need not require flood insurance. But one sudden flood and change the scenario. This need will highly impact the value of the home as buyers will feel hesitant to buy property in the flood zone. Owners owning a property that has encountered damage because of storms need to worry about repairing it, and if the property still stands then one has to bother about its selling. People will show less to no interest in buying a property in such an area that has just faced such a disaster.
Cost of Land
Land is a natural resource and hence it’s scarce compared to property. Thus land price increases much quicker than flat or property price. Thus many individuals buy land more than buying property that causes the drop in value.
These above facts are the cause behind the decrease in the property price.