It’s safe to say that most people’s wealth is concentrated in one area, and for many American homeowners, that area is their home. Sixty-four percent of American households owned their principal residence as of the 2019 Survey of Consumer Finances conducted by the Federal Reserve.
The real estate industry appeals to investors because of its scale and diversity. This article will examine the factors that matter most to the real estate market and the chances available to investors.
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· Demographics- Statistics on a group of people, such as their ages, races, income levels, where they were born, where they live now, where they have traveled, and how rapidly they are multiplying, are all examples of demographic data. Population growth, birthrate, and median household income are all examples of demography. These numbers are frequently disregarded despite their immense weight in determining home prices and building trends. Changes in the country’s demographic makeup can have far-reaching effects on housing prices and sales patterns that can persist for decades. The baby boomer generation, which encompasses people born between 1945 and 1964, is an example of a demographic transition that has the potential to have a significant impact on the real estate market. One of the most astonishing generational occurrences of the last century is how these baby boomers are transitioning into retirement. The market will feel the effects of the baby boomer retirement wave, which began in 2010, for years to come. As an investor, you may want to consider the following considerations in light of the potential impact of this demographic shift on the real estate market. As baby boomers enter retirement, how do you believe this trend will affect the demand for vacation homes in popular destinations? Or, ii) how would this affect the need for larger homes if incomes were to drop and fewer children remained at home? Investors can use these and other criteria to narrow down the type and location of potentially successful real estate investments well before a trend has even begun.
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· Interest Rates- Another critical factor that affects the housing market is interest rate trends. If you plan to finance the acquisition of a property, it is in your best interest to investigate the current interest rates using a mortgage calculator. Depending on the current interest rate, a change could significantly affect a person’s capacity to make a large purchase, such as a home or apartment. This is because the expense of getting a mortgage to purchase a home decreases as interest rates fall. As a result, more people will be looking to buy homes, which will further hike prices. Real estate demand and prices will naturally fall in response to an increase in interest rates since getting a mortgage would become more expensive. When comparing interest rates on bonds to the effect of interest rates on equity investments like a real estate investment trust (REIT), it is easier to see the similarities. This is because both are essentially debt investments. For investors, a lower interest rate means a higher coupon rate on a bond, which increases the bond’s value. In contrast, a rise in interest rates reduces the bond’s value since it becomes less appealing to investors. The high returns offered by REITs become more attractive as market interest rates fall, driving up their value. The value of real estate investment trusts (REITs) falls as interest rates rise because a REIT’s income becomes less attractive.
· The Economy– The overall health of the economy is yet another factor that should not be overlooked when trying to ascertain the worth of a real estate. Most often, this is assessed using economic indicators like GDP, employment rates, manufacturing output, commodity prices, etc. The real estate market’s health is often indicative of the economy’s overall health. Different types of real estate may be affected in different ways by the economy’s cyclical nature. For instance, a hotel-heavy REIT will be hit harder by a recession than an office-focused one. The lease arrangement unique to the hotel sector makes hotels a type of property susceptible to fluctuations in economic activity. In many ways, signing a lease for a hotel room is similar to signing a lease for a shorter time. Guests at a hotel can easily avoid signing such leases if the economy is in the wrong position. On the other hand, office renters often sign longer-term leases that leave them unable to negotiate changes during economic downturns. Therefore, you need to know not only what stage the economy is in but also how sensitive the real estate property in issue is to economic fluctuations.
· Government Policies/Subsidies– The quantity of demand for real estate and its price can also be significantly influenced by legislation. Tax credits, deductions, and subsidies are a few ways the government might temporarily increase demand for real estate while they are in effect. Furthermore, there are a few strategies for temporarily growing real estate demand. Understanding the current government incentives will make it much easier for you to see trends that could lead you wrong and assess how supply and demand are altering. For instance, in 2009, when the economy was in a downturn, the federal government of the United States issued a first-time homebuyer’s tax credit to stimulate slow home sales. The goal was to boost slow home sales during an economic downturn (only those who purchased homes between 2008-2010 were eligible). The Government Accountability Office reported that 2. 3 million persons claimed the tax break. Without knowing that the tax incentive caused the increase, you may conclude that the demand for housing was increasing for other reasons, even though it was quite a sizable increase even though it was only temporary. It’s easy to attribute the rise in demand to some other cause if you aren’t aware that a tax benefit spurred it. There was a rise, but you might not have noticed it if you didn’t know that a tax break caused it.
