- Judith Akatugba
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In the United States in particular, real estate holds a considerable amount of wealth for the majority of the population. A total of 66% of American households were homeowners as of the first quarter of 2023, according to data released by the Federal Reserve Bank of St. Louis.
Many investors find the real estate market to be an appealing and profitable sector due to its size and scale. In this piece, we’ll take a look at four major variables that influence the housing market and the different investment options in real estate.
Read Also: The Crucial Elements of Real Estate Investing
1. Demographics
Information about a population’s age, gender, race, income, migratory trends, and growth rate is known as demographics.
For decades, real estate trends can be heavily influenced by big changes in a country’s demography. Real estate prices and the kinds of houses sought after are both impacted by these numbers, which are frequently disregarded despite their importance.
One demographic trend that may have a major impact on the housing market is the baby boomer generation, which includes people born between 1945 and 1964. The market will continue to feel the effects of the baby boomers’ retirement, which started in 2010, for quite some time.
This kind of change in demographics can affect the housing market in a variety of ways. Here are a few important questions that an investor may have:
1. As more individuals begin to retire, how will this impact the market for vacation houses in popular areas?
2. What impact would lower salaries and fewer families have on the desire for larger homes, given that children would eventually leave the nest?
The answers to these and other questions can help investors narrow down the sort and location of potentially lucrative real estate assets before demographic trends start.
2. Rates of Interest
Another important factor influencing the housing market is interest rates. Using a mortgage calculator, you can easily determine the impact of various interest rates on the purchase price of a home when you’re thinking about getting a mortgage.
A person’s capacity to acquire a home is very sensitive to changes in mortgage rates. This is due to the fact that mortgage payments are directly proportional to the interest rate. Although this is beneficial for borrowers, it has the potential to increase demand for real estate, leading to higher prices. Mortgage costs rise in tandem with interest rates, which dampens demand and drives down property values.
But when we consider how interest rates affect investments like REITs, we can see that the rate-to-price relationship is very similar to the bond-interest rate relationship.
An increase in the coupon rate makes a bond more attractive, which drives up its price as interest rates fall. The value of bonds declines when interest rates rise.
Similarly, real estate investment trusts (REITs) see a rise in price due to the allure of their large returns as interest rates fall. Real estate investment trust (REIT) prices fall as interest rates rise because investors see lower yields on their investments.
3. The Economy
The situation of the economy is another important component that impacts the worth of property. Common economic indicators used for this purpose include gross domestic product (GDP), employment rates, industrial production, product pricing, and so on. As a general rule, real estate prices tend to fall when economic activity is low.
Real estate of different forms can be affected differently by economic cyclicality. For instance, a real estate investment trust (REIT) that has put more money into hotels would probably feel the effects of a recession more keenly than one that had put more money into office buildings.
Because of the nature of the lease, hotels are a kind of real estate that is highly responsive to fluctuations in the economy. When times are tough, hotel guests can simply back out of their short-term leases, which is like renting a room in a short-term apartment. Contrarily, office renters often have longer-term leases that cannot be amended during a recession.
Real estate properties are notoriously sensitive to market fluctuations, so keeping tabs on where the economy is at all times is crucial.
4. Policy and Subsidies from the Government
Property demand and pricing are also susceptible to substantial influences from legislation. The government can temporarily increase demand for real estate through tax credits, deductions, and subsidies, among other methods. It is easier to track shifts in supply and demand and spot misleading trends if you are up-to-date on the latest government incentives.
One example is the first-time homebuyer’s tax credit that the US government instituted in 2009 to stimulate the housing market (the program was limited to individuals who bought a property between 2008 and 2010). Two and a half million individuals claimed the tax break, as reported by the Government Accountability Office.
Although fleeting, this was quite a reaction. Investors may have assumed that there were other factors driving up house demand if they had been unaware of the tax benefit.
