The real estate market is in a constant state of flux. To understand the big picture, it is important to be aware of the external factors that drive the real estate market. For a clearer picture of why the real estate market is changing, here are 10 telltale signs.
What factors drive the real estate market?
While there are more complex factors that drive real estate, we will look at a few of the higher-level factors that play a major role in moving the market. These include:
Demographics. This includes data that breaks down population by age, gender, race, income, population growth and migration patterns. Demographics are usually overlooked when determining the significant factors that impact how real estate is priced and what types of properties are most popular. Shifts in demographics can actually have a major affect on real estate trends over the longer term. One glaring example is the effect that baby boomers (born between 1945 and 1964) continue to have on the real estate market, even as people of this generation transition into retirement, which in itself has had a significant impact on real estate.
Demographics affect demand for second homes in popular vacation areas as people retire and also impact the demand for bigger homes if incomes are smaller and the children have moved out.
Interest rates. If you want to purchase a property with a mortgage you will want to research interest rates using a mortgage calculator. Interest rate fluctuations can affect your ability to buy a home, because the lower interest rates drop, the lower the cost to obtain a mortgage to purchase a property will become, therefore creating more demand for real estate—which itself raises prices.
If you want to know the effect of interest rates on equity investment like a real estate investment trust instead of residential real estate, you can view the relationship as being like a bond’s relation to interest rates. If the interest rate drops, the value of the bond increases because its coupon rate is more desirable. When interest rates rise, the value of bonds falls.
The economy. The strength of the economy is usually measured by employment data, GDP, the prices of goods, and manufacturing activity, among other factors. When the economy is slow, real estate generally follows suit. The economy’s cyclicality can have differing effects on the various types of real estate. For instance, hotels are particularly sensitive to economic activity, due in part to the lease structure that comes with the territory. If the economy is slow, hotel customers can easily avoid renting a hotel room, which can be viewed as a sort of short-term lease. Office tenants, on the other hand, usually have long-term leases that are more difficult to change amidst a slow economy.
Government policies and subsidies. Governments can temporarily boost demand for real estate through subsidies, tax credits, and deductions. If you are aware of government incentives, you will be savvy to changes in supply and demand as well as ID false trends.
Signs that indicate a shifting real estate market
Price reductions. These are unusual during a strong seller’s market. Typically, sellers receive more than the asking price since sellers drive the market. Falling sales prices indicate clearly that the seller’s market is dropping off, with potential homebuyers becoming more reluctant to stretch financially to purchase a property.
Fewer bidders. Usually, houses have multiple would-be buyers engaged in bidding wars. One of the first signs that the market is changing is that there are fewer bidding wars, meaning there are fewer bidders.
Houses are harder to sell. When the housing market is healthy, real estate moves quickly. It is not unheard of for homes to be on the market for under a week. The number of days a home is on the market rises dramatically when the market goes from a seller’s to a buyer’s.
The number of homes for sale rises. Low inventory of homes for sale is a key indicator that it is a seller’s market. A good indicator the real estate market is changing is if inventory levels start to increase substantially. If you want to predict where the market is going, beware of supply and demand. High inventory indicates a buyer’s market; low inventory indicates a seller’s market.
Real estate contracts will contain more contingencies. If it is a seller’s market, buyers typically do whatever it takes to make their offer stand out from the competition, usually by waiving common contingencies. Conversely, when the market shifts from seller’s to buyer’s, common contingencies tend to return to real estate contracts.
Open houses are plenty. When the market changes, real estate agents hold more open houses to prove to their clients they are doing what it takes to sell the home.
If a seller’s’ market is prevailing, buyers even waive house inspections. This is not the case if it is a strong buyer’s market or if it is balanced. Home inspections are usually conducted, and buyers will be more likely to negotiate price reductions or repairs.
If the real estate market is down, real estate companies are laying people off. As the real estate market cools, there is less demand for real estate companies to retain staff—and layoffs become inevitable.
There’s a large inventory of houses for sale. If demand for housing outstrips supply, the inventory of houses on the market will decline. If the market shifts and the supply rises while the demand falls, there will be a larger inventory of houses for sale.