Although real estate bubbles can and do exist, real estate itself doesn't live in a bubble. The real estate market is influenced by a variety of outside factors, which can raise or lower the price of homes and property.
Some factors that affect the real estate market are macro-factors. Macro-factors tend to be large and often influence other areas of the economy or the real estate market as a whole.
Micro-factors also influence the real estate market. While a macro-factor is one that affects the economy as a whole, a micro-factor is more individual. It might only affect the real estate market in one particular area or one particular type of real estate.
While you can't predict the future when it comes to investing in real estate or say with any certainty how the market will perform, having an understanding of the real estate industry and the various factors that have some influence over the real estate market can help you make better investment choices.
10 Factors That Influence the Real Estate Market
Many factors determine the price you might get for a real estate investment if you decided to sell today or the amount of demand there might be for a property you are trying to sell.
Take a look at 10 of the factors that are most likely to impact the real estate market.
1. The Economy
Generally speaking, the real estate market mimics the overall economy. When the economy is doing well, the real estate market tends to do well, too. When the economy is trending downward, the real estate market also tends to trend downward.
One way to understand the economy's impact on the real estate market is to look at the business cycle, also known as the economic cycle.
The business cycle has four stages:
Recovery: The recovery phase of the business cycle is sometimes called a trough. Although things are starting to improve at this phase in the cycle, it often still looks as though things are continuing to decline. In the case of real estate, the recovery phase of the economic cycle can be the ideal time to begin to acquire property, as prices are likely to be low.
Expansion: During the expansion phase of the economic cycle, demand begins to increase. As the economy expands, job growth improves, vacancy rates drop and sale or rental prices tend to increase. It's still possible to find a good value on an investment property during the expansion phase, especially if a property has been neglected or needs some repairs or attention.
Peak: At the peak of the business cycle, output has reached its highest point, and a decline is likely to begin soon. At the peak, some investors might start to worry that the value of their investments will soon plummet. That concern can cause people to sell their investment properties. In other cases, investors might look toward putting their money in real estate that is likely to continue to provide a steady return.
Contraction or recession: After a business cycle has hit its peak, there is nowhere else for things to go but down. During a contraction, the gross domestic product of a country has usually been on the decline for at least two quarters. During a contraction, sales drop, incomes drop and employment typically falls. Contractions are sometimes called recessions, referring to periods when there are several months of continued decline in the economy.
Although you can include employment under the general "economy" umbrella, it's worth taking a look at it as an independent factor that influences the real estate industry. Employment can affect real estate in several ways.
If a state or metropolitan area sees an increase in the number of available jobs and an increase in employees, then there is likely to be an increase in demand for housing in that particular area.
For example, Seattle, Washington, is the location of the first Amazon headquarters. Between 2013 and 2018, the median home value in the Seattle area increased by nearly 73%.
As Amazon gets ready to open a second headquarters in Arlington, Virginia, bringing jobs and workers to the area, it's expected that the housing market in the area will see a similar increase in home value.
Employment doesn't only affect the housing market. Employment opportunities also affect commercial real estate. When a company moves into a new area, it needs to purchase or rent office space. It might need a warehouse or storage space for its inventory or land for development. If multiple employers or businesses express interest in a particular region, demand for real estate in that region increases.
3. Government Involvement
In some circumstances, the government can intervene and affect the real estate market. A government might offer subsidies or credits to buyers to help wake up a stagnant market. For instance, from 2008 until 2010, the U.S. government offered first-time homebuyers a credit of up to $8,000. Credits taken in 2008 needed to be repaid, but credits in 2009 and 2010 were the buyer's to keep as long as they stayed in their home for a certain number of years.
Offering the credit to new buyers encouraged people to buy houses in the middle of the recession, moving the recovery forward and giving the real estate market a boost.
Governments can influence the real estate market in other ways, as well. For example, changes in tax law can make buying property more or less appealing. Fluctuations in interest rates can also help to attract or repel buyers.
Location influences how attractive a particular real estate market is, but it can also affect the amount of opportunity for a specific area. For example, there is often a higher demand for residential real estate in areas with plenty of employment opportunities.
Areas with attractive schools and amenities, such as shopping centers and parks, are also likely to see more demand compared to regions without nearby amenities or with lower-quality schools.
The layout of an area also influences the real estate options and opportunities there. San Francisco is one of the most expensive places in the U.S. to buy real estate. The reason for the high price of homes and property in the area isn't only the employment opportunity offered by Silicon Valley or the attractive area amenities.
San Francisco is also limited in terms of size and ability to add new property or buildings. The city is on a peninsula, meaning it has water on three sides. There's little room for urban sprawl or expansion. Meanwhile, the population of the area has increased by about 10% between 2010 and 2018. There's more demand for property, but nowhere for the property to go.
5. Societal Influences
Changes in society can also have an impact on the real estate market. In the residential market, changes in the typical family structure can alter the demand for certain types of home. For example, if it becomes more common for several generations to live under the same roof, then there might be an increase in demand for houses with in-law suites.
Another example of the way societal changes can influence housing and real estate markets is seen in the upswing in renting versus buying a property.
Between 2006 and 2016, there was a notable increase in the number of households that rented rather than owned their homes. In 2016, 36.6% of heads-of-households were renters, up from 31.2% in 2006. If demand shifts from buying a house to renting one, it's likely that monthly rents will go up in response to the increase in demand.
6. Interest Rates
Interest rates have a significant effect on the real estate market. How much interest a person has to pay on a mortgage affects their ability to afford a mortgage in the first place. Interest rates do more than influence the cost of a property loan, though.
In the case of investment properties, interest rates can affect the income a piece of real estate produces. The more an investor needs to pay for financing, the less net income they are likely to see from renting out the property or using it for other commercial reasons. Higher interest rates can translate to higher risks for investors, which can push the prices and values of investment properties down.
On the other hand, when interest rates fall, there is often an improvement in the real estate market. Since financing is less expensive when rates are lower, investors might be more likely to purchase commercial properties. Residential buyers might also be more likely to buy properties. There is usually an increase in new construction when rates fall as well.
7. Tax Laws
Changes in tax laws, such as changes made as part of the Tax Cuts and Jobs Act (TCJA), can influence real estate. For example, the TCJA raised the standard deduction for single filers to $12,000. For married couples filing a joint return, TCJA raised the deduction to $24,000. The increased standard deduction can be a more appropriate choice for certain homeowners compared to itemizing deductions. That can mean that there's less of a tax benefit to homeownership for some buyers.
The TCJA also adjusted the limit on deductible mortgage debt to $750,000 on loans taken out after December 15, 2017.
Although a lower tax bill isn't the sole reason why people purchase property for residential use or as an investment, the potential for a lower tax bill is an added benefit. If tax laws change and eliminate many of the incentives for buying property, there might be a reduction in sales or less demand for real estate as an investment.
8. Supply and Demand
Overall supply and demand also influence the real estate industry. During a seller's market, inventory is limited, but the demand for property is high. The market is working in favor of the sellers. A person trying to sell real estate might see bidding wars or get offers above asking price for their properties.
But when there's less demand for property and fewer buyers out looking for real estate, the situation flips. The market becomes a buyer's market. Those looking for property often have plenty of options. They are also more likely to get a better price on a property or might be able to bid below asking price and have their offer accepted.
Supply and demand can vary based on area. There might be micro-trends that affect supply and demand, such as a recent influx of home buyers into a city or a local business deciding to hire an additional 1,000 employees. Other factors that encourage people to move out of an area, such as a major employer closing its doors, can increase the available supply of real estate for sale, reducing demand for property.
Demographics have a significant effect on real estate marketing and trends. For example, in 2018, millennials — people born between 1981 and 1996 — were the largest generation of home buyers and were responsible for 37% of sales.
A younger generation of buyers is likely to expect or want different things in a home compared to previous generations. For example, millennial homebuyers value high-quality school districts and convenience to their job compared to Baby Boomers and the Silent Generation. Millennial buyers also care more about the overall quality of the neighborhood than older generations.
Millennials also use different methods when it comes to looking for property compared to previous generations. About 62% of millennial buyers found their home online, compared to 46% of buyers between the ages of 54 and 63. Around 92% of millennial buyers used the internet "frequently" during their home search compared to 80% of buyers between 54 and 63 years old.
Where potential buyers live will also influence the real estate market. For example, if a large number of potential first-time buyers all live in one city, there is a chance the city will see an increase in demand for starter homes when the potential buyers decide it is time to buy. If many empty-nesters or retirees are living in another area, there is a chance that demand for condos or smaller houses will increase in the coming years, as people start downsizing.
Changes in technology can also affect the future of the real estate market. Online real estate marketing now makes it possible for people to look at potential properties and even "tour" those properties without stepping foot inside of them.
Technology has also opened doors to other methods of buying and selling a home, such as selling premier property through an auction rather than a traditional listing service. With technology, sellers can find the most appropriate target buyers for a property, streamlining the process and setting the terms of the sale on their own schedule.
Learn More About Tranzon and the Auction Advantage Today
Whether you want to sell residential real estate or commercial real estate or are just looking for a market analysis or an in-depth discussion of the real estate market in your area, Tranzon can help.
Tranzon has a nationwide network of real estate professionals who combine in-depth local knowledge with the resources of a national company.
Contact us today to learn more about the auction process and to schedule a free evaluation of your property.