Just like any other industry, the US housing market 2019 is affected by the law of supply and demand. Understanding real estate supply and demand will help you make wiser investment decisions, thus enhancing your chances of success.
When there is a surplus in real estate supply, price usually decreases and it becomes a buyer’s market. On the other hand, when housing inventory is low but real estate demand is high, prices increase and the absorption rate is high, thus making it a seller’s market. Though it is possible, it is very hard to find situations when supply and demand are equal.
The main variables at play in real estate demand and supply are uniqueness and immobility. Uniqueness means that no matter how similar two investment properties may be to each other, they will never be completely alike since each has its own unique geographic location. Immobility refers to the fact that property or land cannot be moved from one place to another to meet demand where supply is low. Due to uniqueness and immobility, the conditions that influence prices will vary from one geographical market to another. For example, a waterfront property in California could be more costly compared to a waterfront property in Arkansas. A proper real estate supply and demand analysis is therefore important before jumping into the housing market.
Here are some of the factors that affect real estate demand and supply. If you pay close attention to them, you will understand the state of demand and supply in the investment market of your choice and be able to act accordingly.
1. Government Policies
Government policies can either create opportunities for people to prosper or create an environment that hinders economic growth. Such policies can even affect the real estate market directly. For instance, the government might decide to enact a policy that sets limits on what a landlord can charge. Placing a ceiling on rents could be a move intended to increase affordable housing for low-income tenants. However, the ultimate result of such a policy would be a decrease in rental properties in the area since real estate investors will shy away.
Another government policy that affects real estate supply and demand is taxation. This could be in the form of local and state taxes, business taxes, property taxes, and capital gains. High taxes will mean higher property prices, which is likely to reduce demand significantly.
Some of the ways the government seeks to boost real estate demand are through subsidies, deductions, and tax credits. Being aware of such incentives will help you take advantage of the opportunities that arise. For instance, in 2009, home sales were sluggish in the U.S. In an attempt to change the situation, the government introduced a tax credit for first time home buyers. A study by the National Association of Realtors (NAR) showed that this incentive resulted in sales of 900,000 homes. As an investor, therefore, you need to stay updated on the current and upcoming government policies before undertaking any real estate investment strategy.
2. Interest Rates
Changes in interest rate will have a significant impact on house price trends and people’s ability to buy property. If interest rates drop, the cost of getting a mortgage will be lower, thus resulting in a higher real estate demand. On the other hand, a rise in interest rates will make mortgages expensive and reduce buyer demand. Therefore, the best time to invest in real estate is when interest rates are favorable.
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3. Wage and Employment
People usually decide whether or not to buy a rental property or move into an area based on job openings and the level of wages. Many towns all over the world have grown in response to a mine, factory or any other business operation being established. This is why investors must stay up to date and informed on such real estate market trends. High employment rates are usually an indication that real estate demand will rise in the area.
Demographics refer to data that shows the composition of a population. This could be things such as gender, race, birth rates, death rates, migration patterns, income levels, and population growth. Though these statistics are usually ignored, they have a major effect on what kinds of houses for sale are in demand and how they are priced. For example, if the population of an area is made up predominantly of young professionals, there is likely to be a higher real estate demand for condos and single family homes. As a real estate investor, you must take the time to study population statistics before making an investment.
5. The Economy
Another major factor that influences real estate supply and demand is the overall state of the economy. This is measured using economic indicators like the GDP, prices of goods, and manufacturing activity. While a vibrant economy is likely to result in high demand for real estate, a sluggish economy will lead to slow growth in real estate. A good indicator of the state of the economy is employment trends. If businesses in the area are continuously downsizing, it could be an indication that the economy is not doing very well.
6. Housing Market Crash
The great recession in the mid-2000s was a direct result of real estate supply and demand. Before the financial crisis, property investors were enjoying very low borrowing rates. In addition to offering low mortgages, banks also relaxed their lending standards. As a result, people that could not previously afford property were now able to achieve their dreams. During this period, speculative buyers flooded the market and started buying and selling real estate, thus causing prices to rise sharply. When they started pulling out of the market, demand dropped drastically. This resulted in excess real estate supply and decreasing property prices.
As a real estate investor, always be cautious about markets that people are rushing into for short term profits.
Related: What Are the 4 Real Estate Cycles?
It is clear that there are many forces that influence real estate demand and supply. Continuously studying such factors and keeping track of the housing market forecast will significantly improve your selling and buying real estate skills.
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