For most people, real estate represents a significant portion of their wealth. This is especially true for homeowners in the United States, as 65.2% of American families own their own primary residence. The real estate market’s size and scale makes it an attractive and lucrative sector for many investors, but to successfully invest (or even buy and sell) in the space, you’ll need to know what factors drive the real estate industry. Here are a few:
Simply put, demographics are the data that describes the composition of a population, such as gender, age, race, income, and so on. While demographics are often overlooked, they’re a significant factor that affects how real estate is priced and what types of properties are in demand. Major demographic shifts, such as the aging of baby boomers, have a tendency to affect everything in the real estate sector from demand to consumer trends.
Changes in interest rates can greatly influence a would-be buyer’s ability to purchase a residential property. As interest rates drop, the cost to obtain a mortgage to buy a home is lowered, thus creating a higher demand for real estate (which, incidentally, pushes prices up). Interest rates have a substantially different impact on real estate investment trusts or other equity investments in real estate, more closely resembling that of the relationship between a bond and interest rates.
The overall health of the economy, not surprisingly, plays a major role in the value of real estate. Generally measured by economic indicators such as the GDP, manufacturing activity, employment data, and the like, the economy and the real estate market have a positively correlated relationship with each other- when one rises, the other rises, and when one falls, the other does as well. The type of real estate affected by economic shifts is worth noting, as commercial real estate that’s less correlated to the cyclicality of the market (say, office tenants with long-term leases) will be less impacted by a downturn in the economy than, for example, a hotel that’s dependent on occupancy for revenue.
Legislation generally plays a major role in determining property demand and prices, with deductions, subsidies, and tax credits being some of the ways the government can temporarily boost demand for real estate. It’s vital to be aware of current government incentives if you’re hoping to determine changes in supply and demand and identify potentially false trends.