Whether you’re investing in the real estate market, thinking to fix-and-flip or just selling your home, understanding the housing market is critical. There are many factors that can impact the real estate prices, investment potential and your decision. Simply determining what market you’re in today can help you make the right decision when listing or buying your house.
The primary factors that affect the residential real estate market in general are:
1. Supply and Demand
The state of the residential market depends on the number of available homes – supply, and the number of buyers – demand. These create buyer’s and seller’s markets.
A buyer’s market is when there are more sellers looking to sell homes than there are buyers looking to buy them. Buying in a buyer’s market means you have a lot of power. You most likely get lower price, a variety of houses to choose form, and a closing date that works well for you.
A seller’s market is when few homes are for sale, but there are many buyers. Buying in a seller’s market can be difficult, since prices tend to be higher. Sellers in this market have a lot of power: you are likely to get several offers for more than your asking price, be able to dictate the terms you prefer, and may not need to fix up your home before you put it in the market.
The exact market you’re in should dictate your approach as you choose investments, make offers and negotiate deals.
2. Median Home Prices
Median home prices are a useful indicator that can give you a hint of the state of the housing market today, and the direction it can be taking in the nearest future. You can determine if home prices are increasing or decreasing based on the change in median home price.
Sellers benefit from rising home prices, while buyers have more power when prices are decreasing.
National Association of Realtors (NAR) releases median home price data quarterly for houses in metropolitan areas. You can check the median home prices, however it’s important to be tuned-in to your local market — not just what’s going on nationwide. Another important indicator for median price comparison is the seasonality: when comparing prices make sure to choose the same time period a year earlier since there are high and low seasons in the housing market.
3. Mortgage Rates
Many people require a mortgage to buy a house. Banks, credit unions and other lenders set mortgage rates that fluctuate based on economic factors, such as inflation and the federal funds rate.
When mortgage rates are rising, financing a home purchase becomes more expensive, deterring potential homebuyers and decreasing the demand to buy. The opposite effect occurs when rates are dropping.
As financing becomes cheaper, more people decide to buy a home rather than rent.
4. Overall Economic Situation
Another key factor that affects the value of real estate is the overall health of the economy. Many of the fundamentals discussed above play a role in the economy. Broader economic factors like employment, job creation, manufacturing activity, household formation and wage growth also affect the demand to buy homes. These factors provide financial security and lead to a higher demand for homes.
A strong local economy can be a positive factor for a strong local housing market with healthy demand and rising prices.
Other factors, such as demographics, construction prices, government policies and subsidies, overall political situation, can all play a key role in the housing market since they can boost or hinder the demand for real estate.
Using fundamental factors as a guide for your future housing decision
In reality, real estate markets are always unpredictable, especially in the post-pandemic world. Home prices, interest rates, and market trends evolve daily. No matter how in flux the market is, understanding the fundamental factors is essential, as it can help buyers and sellers make smarter decisions when it comes to their most expensive assets.
This Blog is made available for informational purposes only. All writers’ opinions are their own and do not constitute financial, tax, legal, insurance, or investment advice in any way whatsoever. This Blog should not be used as a substitute for competent financial, tax, legal, insurance, or investment advice. Arzuman Brothers always encourages you to perform your own individual research and/or reach out to a qualified professional advisor regarding your own situation.