Since the housing crash in the late 2000’s, the real estate market in the United States has regained its composure, which paved the way for low-interest rates and limited housing inventory. This may look ideal for sellers but a burden to homebuyers (and even renters!) because they have to face increasing housing prices, long searching period, and bidding wars as they enter the increasingly competitive market.
Several complicated factors affect the price of properties, and some are unfortunately outside of our control. Still, it’s important to be aware of these things so that you can time your purchase correctly, or - if you’re selling - list your property at the right time.
1. The economy
The Great Recession that happened in 2008 to 2012 highlighted the connection between the macro economy and real estate. Real-estate related jobs such as construction and mortgage financing underwent significant property depreciation. Note that even other local macro-trends can influence housing prices. For instance, the income growth in California was at 1.2% in the first quarter of 2015 compared to the national average of 0.9%. This increases the spending power of buyers which in turn also increases real estate prices. The demand for housing is often considered income elastic (luxury good) which means rising incomes lead to a more significant percentage of income being spent on houses.
To sum it up, the state of the economy impacts the real estate market, as the consumers’ ability to hold up to property prices depends on critical factors such as the GDP, income growth, manufacturing activity, and unemployment.
2. Interest rates
As interest rates rise, mortgage rates also increase, which consequently lowers the demand and price of real estate. The real estate crash of 2007 proved the global impact of the real estate market increased awareness of how interest rates and loans are used in home buying. If things aren’t looking good abroad, it might affect your ability to sell homes domestically. Be in the know on what’s happening in the global market and with foreign investment as these play large roles into the expectations of the local market as well.
Properties within the proximity of establishments such as a slew of restaurants, parks, and schools, the price of houses are higher. In line with this are zoning restrictions which indirectly affect land value and directly impacts tax value. Do take note that local builder activity and local regulations in the area can dictate new home supply, and prices react to the abundance or the lack of supply of houses.
While properties remain where they are, what happens around them inevitably affects its value. The price of a house is not only dictated by what it is today, but also what it can be 5, 10, 20 years from now. New roads, schools, and other attractive infrastructure can affect the desirability of a location almost in an instant. However, even though no one can predict developments and declines with absolute certainty, a professional who knows the community in which a property is located will be able to provide valuable insight.
According to research by the National Association Realtors (NAR), the percentage of homes purchased by investment buyers stands at about 20% of the market. Investors are those that buy inexpensive properties to either renovate and sell for profit or put it up for rent. The housing crisis which increased the number of distressed properties (those that were foreclosed or were on short sale) made investors purchase more property. But if the number of such houses decreases, investors will want to liquidate some of their properties at some point. And if they do so untimely, this could result in too many homes hitting the market at once, which in turn could reduce the price of houses.
5. Neighborhood comparables
Comparable properties (also known as “comps”) sold in an area can also affect another home’s market value. Appraisers and real estate agents look at recent sales of homes with similar features to use as a standard against a home’s potential price. Foreclosures and short sales often complicate things because they tend to sell at lower prices, which decrease the neighborhood’s overall average sales price. Comps (along with offer details) are usually the key driver for the appraisal process, as most appraisers will rely heavily on recent nearby transactions on homes of similar sizes and features.
Remember, as with any other investment, there are a lot of factors in real estate that will be outside of your control. But staying informed about what’s happening in the market can help you make informed decisions that will allow you to maximize your returns.