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Understanding the real estate market is crucial for anyone looking to buy or sell a property, but it's especially important for real estate investors. The market can be influenced by several factors, including supply and demand, median home prices, new construction, mortgage rates, and the overall economy. By understanding how these factors impact the market, investors can make informed decisions about when and where to invest.
In this blog post, we'll break down each of these five factors and provide tips for investors on how to navigate the real estate market. If you are just getting started in real estate investing this guide will help set you up for success before doing that first deal.
It is definitely worth noting that no matter the state the market is in there are opportunities to be successful as an investor, as we’ve heard from many of our partners during their thought leader spotlight interviews. Understanding the state of the market and why it is in that state helps you still be successful, so let's dive right in.
How Supply and Demand Creates a Buyers Market or Sellers Market
Supply and demand is a crucial factor that affects the real estate market. Simply put, when there are more properties available for sale than there are buyers looking to purchase, it's a buyer's market.
In a buyer's market, the power lies with the buyer as they have more options to choose from and sellers may need to be more flexible on pricing or willing to make repairs to their property to attract buyers. When the market is in this state interested buyers may have the luxury of taking their time to find the perfect home and negotiating on price.
Conversely, when there are more buyers looking for properties than there are available homes for sale, it's a seller's market. In a seller's market, the power lies with the seller as they may receive multiple offers and have the ability to command a higher price for their property. With a seller's market, buyers may need to act quickly and make competitive offers to secure a property. In some situations, this creates bidding wars between buyers and creates offers way above the list price.
We’ve seen different shifts in the market over the last decade. The market went from being a buyer's market to a seller's market. Then with rising interest rates, we can see the market shifting again, but we will go deeper into interest rates later.
Housing Market Direction Hinted at by Median Home Prices
Median home prices can provide a helpful indication of the direction of the housing market but should be analyzed with caution. Remember that this is the median home price, not the high and lowest prices.
You should look at the housing prices from the same period years prior to predict this trend, even though it might be tempting to just look at previous months. Seasonally the prices in housing fluctuate, from December to July you’ll see completely different numbers. And if you think about it, it makes sense why this happens. We don’t see a lot of people wanting to have to look at houses and move in the cold winter, whereas people might be more willing to do that in the summer.
Now, let’s get into how Median Home prices can help hint at the housing market’s direction.
Generally, when median home prices are rising, it suggests that the housing market is in a period of growth and stability. This can indicate increased demand for housing, as well as a strong local economy.
Conversely, when median home prices are falling, it can suggest that the housing market is in decline and that the local economy may be struggling. When other factors are present like an increasing rental vacancy rate this can be a huge warning sign for investors. You can learn more about the process of evaluating different housing markets as well as a ton of different resources to find this information in our Best Cities to Invest Blog.
As a real estate investor, it's important to consider median home prices along with other factors such as rental rates, vacancy rates, and potential for appreciation when making investment decisions. By staying informed about median home prices and other market factors, investors can position themselves to make smart decisions and maximize their returns in the real estate market.
New Construction Increases the Market’s Supply
When there is a lot of new construction in a particular area, it can lead to an increase in the supply of available homes. This can lead to a decrease in prices and create a buyer's market.
On the other hand, when there is a limited amount of new construction, it can lead to a decrease in the supply of available homes. This can lead to an increase in prices and create a seller's market.
As a real estate investor, it's important to understand the impact of new construction in your local market. If there is a lot of new construction happening in a particular area, it may be an indication of a growing and developing market. However, if there is an oversupply of new homes, it may take longer for investors to see a return on their investment.
One way to understand the impact of new construction in your local market is to look at building permits and zoning changes. This can give you an idea of the amount of new construction that is planned for the area, and how it might impact the supply and demand dynamics.
It's also important to consider the type of construction that is taking place. For example, if there is a lot of new luxury housing being built, it may not have as significant an impact on the overall market as more affordable housing developments. When you are searching for those distressed properties this can also be a factor to look at, so you can see if there is a need for your chosen property type based on if the supply is oversaturated.
Low Mortgage Rates Increasing Demand
Low mortgage rates can have a significant impact on the real estate market by increasing demand for homes. When mortgage rates are low, it becomes more affordable for buyers to purchase homes and make monthly mortgage payments. This can lead to an increase in demand for homes, which can drive up prices and create a seller's market.
On the other hand, when mortgage rates are high, it can make it more difficult for buyers to afford homes and may decrease demand for homes. This can lead to a decrease in prices and create a buyer's market.
Several factors can impact mortgage rates, including inflation, economic growth, and the actions of the Federal Reserve. As a real estate investor, it's important to stay informed about these factors and how they may impact mortgage rates in the future.
One way to understand and track mortgage rates is to follow economic news and stay informed about Federal Reserve policies. Real estate investors can also work with mortgage brokers and lenders to get up-to-date information on current mortgage rates and trends in the market.
It's important to note that mortgage rates can vary significantly depending on factors such as credit score, loan term, and down payment. As a real estate investor, it's important to consider these factors when evaluating potential investments.
By staying informed about mortgage rates and other market factors, real estate investors can position themselves to make smart investment decisions and maximize their returns in the real estate market.
Economy
The overall economy can have a significant impact on the real estate market. Economic trends such as interest rates, wage growth, tax incentives, and job opportunities can impact supply and demand, median home prices, new construction, and mortgage rates.
As promised earlier, here is our deep dive into how interest rates affect the housing market. When interest rates are low, it becomes more affordable for buyers to purchase homes and make monthly mortgage payments. This can increase demand for homes, which can drive up prices and create a seller's market.
On the other hand, when interest rates are high, it can make it more difficult for buyers to afford homes and may decrease demand for homes. This can lead to a decrease in prices and create a buyer's market.
Similarly, declining wages or a lack of job opportunities can impact the demand for housing, as individuals may not have the financial means to purchase or rent homes.
Real estate investors should stay informed about economic trends and their impact on the real estate market. This can involve following economic news, monitoring interest rates and tax policies, and staying up-to-date on job growth and industry trends.
Why It’s Important for Real Estate Investors to Understand the State of the Housing Market
Understanding the state of the housing market is crucial for real estate investors. Unlike individual homebuyers or sellers, investors are looking for opportunities to generate returns on their investments. Changes in the market can have a significant impact on these opportunities.
For example, a decline in home prices or an oversupply of available homes can create opportunities for real estate investors to purchase distressed properties at an even lower cost and renovate them to sell or rent. On the other hand, a strong housing market with high demand and rising prices may present opportunities for investors to purchase properties and generate significant returns through appreciation and rental income.
Real estate investors who stay informed about market trends and changes can position themselves to take advantage of these opportunities.
By understanding the supply and demand dynamics, median home prices, new construction, mortgage rates, and the overall economy, investors can identify potential opportunities and make informed decisions about their investments.
One way to use market trends to your advantage is to have a solid understanding of your investment strategy and goals, as well as your risk tolerance. In any state of the market, it is important to buy right and know your numbers to ensure your investment will cash flow.
By staying informed about market trends and having a clear investment strategy, real estate investors can position themselves to make smart investment decisions and maximize their returns in the real estate market