For many homeowners in the United States, real estate accounts for a sizable amount of their wealth. In 2019, 64.9% of American households owned their principal residence, per the Federal Reserve’s Survey of Consumer Finances.
The real estate market is appealing to many different types of investors due to its size and scale. The real estate market and the various investment opportunities will be discussed in this article.
Study Questions
- Prices, availability, and investment possibilities in real estate are all affected by several variables.
- Buyer demographics include retirement status, household income, preferred location, and the likelihood that a buyer may purchase a second home or vacation property.
- The cost of obtaining a mortgage is reduced when interest rates are low, which attracts more purchasers, but increased demand for real estate can lead to price increases.
- Investors can lessen their exposure to real estate price fluctuations caused by economic downturns by purchasing real estate investment trusts (REITs) or other diversified holdings uncorrelated with economic cycles.
- Government policies and legislation such as tax breaks, deductions, and subsidies can stimulate or dampen demand for real estate.
The Forces That Shape the Housing Market
Demographics
Age, race, gender, income, migration trends, and population growth are all examples of demographic statistics. These numbers are frequently disregarded despite their importance in determining real estate prices and demand. Big changes in a country’s population structure can influence housing markets for decades.
One demographic development that could have a major impact on the housing market is the aging of the baby boomer generation (those born between 1945 and 1964). The retirement of these baby boomers, which began as early as 2010, will be observed in the market for decades to come. This transition to retirement is one of the more noteworthy generational phenomena of the last century.
There are many ways in which a movement in population can affect the housing market trends, but an investor should consider the following. As baby boomers enter retirement, how might this trend affect the demand for second homes in hot holiday spots? Alternatively, if salaries are lower and children have left home, how would this impact the desire for larger dwellings? Long before a trend has begun, these and similar inquiries can help investors zero in on the type and location of potentially profitable real estate purchases.
Four main factors influence interest rates in the housing market.
The real estate market is also significantly affected by interest rates. Using a mortgage calculator to look into interest rates is a smart move if you plan on financing a house purchase. The ability to finance the purchase of a home is sensitive to fluctuations in interest rates. As mortgage financing becomes more affordable, more people can afford a home, increasing demand for real estate and prices.
Real estate demand and prices fall as interest rates rise because of the higher mortgage cost.
Unlike the impact of interest rates on a bond, the impact of interest rates on an equity investment like a real estate investment trust (REIT) is analogous to the impact of interest rates on residential real estate. A bond’s value increases as interest rates fall, making its coupon rate more attractive to investors, whereas bond values fall as interest rates rise. REITs’ high returns are also desirable when market interest rates fall, increasing their value. When rates rise, real estate investment trusts (REITs) lose value because their income is less appealing.
The Market
The situation of the economy is another major aspect that determines the property’s market value. Indicators of economic health include gross domestic product, employment rates, factory output, consumer price index, etc. In general, real estate activity slows down alongside the economy.
However, economic cycles may have diverse impacts on various property categories.
An economic downturn would have a greater impact on a REIT whose investments were concentrated in hotels than on one whose holdings were in office buildings. Due to the nature of the hotel lease, the industry is very sensitive to economic growth or contraction. Hotel stays are like any other short-term lease; if the economy could be better, guests have no obligation to stay there. Contrarily, office tenants are often stuck in their long-term agreements during economic downturns. Therefore, you need to be aware of where the economy is in its cycle and how economically sensitive the real estate property is.
Subsidies and other government policies
Property demand and prices can also be significantly influenced by legislation. The government can temporarily increase demand for real estate as long as certain incentives are in place, such as tax credits, deductions, and subsidies. Supply and demand shifts and potentially misleading patterns can be gauged using knowledge of present government incentives.
For instance, the U.S. government offered tax credits to first-time buyers in 2009 (for properties purchased between 2008 and 2010) to stimulate home sales during a recession. The Government Accountability Office reports that 2.3 million people used the tax break.
This was a considerable, albeit temporary, increase, and you might have concluded that demand for housing was rising for reasons other than the tax benefit but had yet to learn that it was the cause.
Real estate investment trusts (REITs), exchange-traded funds (ETFs), and other managed funds provide typical investors with a safer and more rewarding alternative to direct real estate investment.
Where Should One Put Their Money?
Many investors find the real estate market appealing because of its size and potential profits. Real estate investments can be made either directly in buildings or indirectly through managed funds. Buying a home or business intending to rent or flipping it for a profit is an example of direct real estate investment. Investing in real estate mutual funds, commingled real estate funds, infrastructure funds, and investment trusts are indirect ways to engage in the real estate market. Average investors like indirect real estate investments due to the greater liquidity accessible on the market, the cheaper transaction costs, and the lower capital requirements.
In Conclusion
There are a lot of intricate aspects at play in the real estate market, and this article only touched on a few of the more obvious ones. Some elements above correlate directly with the market, but the outcomes may vary greatly. To make an informed decision about an investment, it is crucial to have a firm grasp of the fundamental forces shaping the real estate market.