Moving the Real Estate Market
What drives the real estate market? The question is loaded and will take some time to explain. For the average American, real estate represents about one-third of his or her net worth. That's significant, especially considering that when you lump it all together in the US alone, the dollar value is close to $20 trillion for the entire market. There's no doubt about it, the real estate market is a lucrative and attractive place for investors to put their money.
What Influences the Real Estate Market?
There are several factors that influence the real estate market, some of which we'll discuss here. First, we'll look at demographics. Whether you're talking about radio stations or real estate, the numbers are drawn from the same pool. The technical definition of demographics is: they are the data that describes the composition of a population, such as age, race, gender, income, migration patterns and population growth. Even though these numbers are very significant, they are often overlooked when it comes to pricing real estate and determining what kind of properties are in demand. If there is a significant movement in the demographics of a country, the ripples of those changes will go on for generations.
The Power of Boomers
Here's an example of what we're talking about. Baby boomers were born between 1945 and 1964. They are considered a very influential demographic, especially in the real estate arena because they have the potential to change the face of the real estate market. In 2010 these Boomers began to retire and since they've had such an impact on the economy, business and real estate, this trend will show up in the market for decades to come.
Now, if you're an investor, this type of demographic shift should be eliciting some questions. For instance, as more people start to retire, will the demand for second homes in "nice warm places" increase? Another thought would be the impact on the purchase of higher priced, large homes after the kids have flown the coop. By asking pointed questions, investors can narrow things down to the point where they're putting their money in the best markets in real estate.
The Impact of Interest Rates
Another factor that impacts the real estate markets is interest rates. The ability to buy a piece of real estate can be influenced greatly by any changes in interest rates. That translates this way: interest rates fall, meaning the cost of getting a mortgage is lower. So, more people get mortgages pushing the prices of real estate up because there's more demand for housing. On the other hand, if interest rates are high the opposite happens - housing sales fall off and prices lower to allow for sales in a slow market.
It Works Like Bonds Work
When looking at this from a different perspective, the interest rates on a real estate investment trust (REIT), which is an equity investment and not a residential property ownership, the relationship of interest to investment changes. Now it becomes something akin to a bond's connection to interest rates. If you own bonds, then you know that when the interest rates go down, the value of the bonds goes up. Conversely, when interest rates go up, the value of the bonds goes down, because the coupon rate of the bond is affected. In the same way, when interest rates fall in the real estate market, REIT's yield is better so it pushes the value up. When the interest rates increase, the values go down because the yield is lower.
These two factors are part of the basic higher-level factors that influence the real estate market. However, there are more factors which we will cover in another article. Keep an eye out for our thoughts on the economy and government subsidies to get a more rounded picture of real estate investments.
