Whether you are looking at buying a home, selling your home, or even entering the real estate investment landscape, there is a lot to know about what moves the market. However, while entire books have been written about the intricacies of the real estate market, most market movement and behavior come down to the effects of just 4 individual factors.
These factors are the current interest rates, the overall economic state, the potential for government subsidies or valuable tax credits, and, of course, the demographics that will be buying or selling the real estate. Each of these factors can cause market movement on their own, but when they move in concert like was seen during the early stages of the pandemic, they can change the entire real estate industry. Here are the 4 key factors helping drive the real estate market.
Current Home Buying Demographics
One of the most crucial aspects of selling real estate is having someone that eventually wants to buy it, but when there is a diminishing number of people able to buy that real estate, it can cause the market to grind to a halt. Key indicators show that not only are millennials experiencing some of the most potent wage stagnation in history, with some estimates placing wage growth at just 0.3% for the ten-year span ending in 2017. With median wage growth in one of the demographics most vital to the survival of the residential real estate market being non-existent, the impact on the housing market can be unpredictable.
Interest rates, which are set by the Fed, are one of the largest quantifiable factors involved in driving the movement of the real estate market. The most basic mortgage calculator can show potential homebuyers the incredible differences between even a single percentage point over the life of the entire loan. Even small changes in interest from one loan to another can make it completely unusable or inapplicable to the borrower.
As interest rates climb, they put more financial pressure on the buyers as the overall cost of mortgages increases. This prices many potential buyers out of the market, lowering overall market demand and causing a drop in market prices shortly after. This then results in the sellers of real estate lowering prices to compensate for the lower demand.
When interest rates fall, it makes getting a mortgage incredibly cheap and relatively easy, which creates a larger pool of potential buyers. This larger supply of buyers puts a much heavier demand on the housing market. This means those controlling the supply will likely increase prices until an equilibrium is formed and the market stabilizes.
The Overall Economic State
Another very important factor in the performance of the real estate market is the overall performance of the economy at the time. Common metrics for the state of the US economy include the GDP, the employment rate, price of goods, rate of inflation, various measurements of the industrial indexes, and more. In a general way, when the economy is good, so is the real estate market.
However, in commercial real estate, there are ways to hedge against this risk of economic downturn. In the case of Real Estate Investment Trusts (or REITs), the degree to which they are affected will depend greatly on how they are diversified in the real estate market overall. REITs that have concentrated and focused holdings on office buildings may have an increased ability to weather economic volatility over a REIT focused on family-friendly eating establishments.
In situations where the economy turns bearish, and people have lower amounts of disposable income, trusts that have massed assets in the hospitality and entertainment sector will see a significant dropoff in month-over-month return. The REITs that have holdings that revolve around offices and other commercial locations for workforces will likely see much less volatility.
However, this isn’t always the case as 2020 and 2021 brought significant volatility with office and business sector real estate and mass migration to more remote workforces. This had a unique effect on the real estate market. It will undoubtedly continue to affect the previously office-bound workforce as the remote workforce continues to evolve. If you are a real estate investor and are looking for a way to potentially increase ROI even when the economy is down, a REIT may be an asset to your portfolio.
Active Government Subsidies
While there haven’t been any groundbreaking government subsidies created for several years, there are some that can still be taken advantage of. In most cases, these are treated as tax credits or tax rebates, but the homeowner must know about them as well as how to qualify.
There was a tax credit for first-time homebuyers that the federal government created after the housing bubble burst, which was created to help rebuild the housing market. Unfortunately, it was only available to first-time homebuyers that bought their first home in either 2008, 2009, or 2010, but that was enough of a push that millions of first-time homebuyers entered the market and bought their first homes.
Additional tax credits are available for those buying homes upgraded to more eco-friendly solar energy. These solar energy tax credits fuel home-buying in areas where the systems are popular. They are helping the housing market access more traditionally difficult-to-capture millennial and gen-z homebuyers. However, these tax credits phase out by 2024, so unless they are replaced, there is likely to be a slowdown of market activity in areas where those credits are driving movement and growth.
Undeniable Factors Driving The Real Estate Market
Many people may not realize the incredible influence these 4 factors can have on the the real estate market. From the residential home buying market to the commercial real estate market, these 4 factors have more influence than all other factors combined. So, if you are looking at entering the real estate market, be sure you are familiar with how these variables can affect your potential transactions.