Property ownership makes up a significant portion of the average American’s net worth, and homeowners have a considerable amount invested in their home’s value. A big picture look at what primary factors drive the real estate market can help prospective home buyers and current homeowners alike better understand when to buy or sell a home, and why home values can increase and decrease.
Numerous factors affect the U.S. real estate market, from construction to demographics. Most of these factors are interdependent and broad in scope, but all play a part in shaping the climate of the market.
Primary factors that affect the real estate market include:
- The Economy: the nation’s overall economic health
- Demographics: a population’s socio-economic factors
- Interest Rates: the cost of money
- Government Policy: regulations, taxes, and deductions
Our nation’s economic health is largely based on our Gross Domestic Product (GDP) and Gross National Product (GNP). Both are measurements of how much a nation produces in goods and services each year, domestically and internationally. Steady growth (2% – 3% percent per year is ideal) means unemployment (4.7% – 5.8% of population) and inflation (2% – 3%) are in balance, and the overall economy is considered healthy. Here, people have jobs and wages are good. When this occurs, people can afford to buy homes and make their mortgage payments, new home construction is taking place, and the chance of foreclosure is low. When there is little to no growth, or a stagnate economy, people either don’t have the ability to buy homes or are hesitant to do so. Negative growth is, obviously, an indicator that the economy is not doing well, which can result in foreclosures due to job and wage losses, and a decrease in overall consumer confidence.
The composition of a population plays a big part in real estate market changes. Age, race, gender, income, education level, family size, birth and death rates are some demographic indicators. These socio-economic factors, when studied, can forecast market trends. Baby Boomers make up about 20% of the population and are in retirement mode right now. Their home buying decisions, such as, downsizing, moving into assisted living or retirement communities, and relocation will all affect the real estate market. It may create niche markets for those that want to live out their days in comfort and move in to luxury homes. As a result, home values will fluctuate based on supply and demand. During their working years, this demographic was a huge influence on the economy with purchasing power and what they do next with their gains in retirement will create trends and influence home purchases for successive generations.
Today, Millennials have replaced Baby Boomers as the largest segment of home buyers and their buying trends may not mesh with current market availability. Buying homes later in life, closer to urban areas, and smaller or older homes are some features of this demographic. And, what they buy, when they buy, and their willingness to adapt to market changes will influence future real estate trends.
Of course interest rates impact housing trends. Interest rates are determined by a number of factors which include the actions of the U. S. Federal Reserve, the health of the economy, and the rate at which people save. Typically, when interest rates are low, people are more apt to take out a mortgage because it costs less to borrow the money. As well, people may borrow more money than when interest rates are lower. Lower interest rates also can allow more developers to build more homes because it cost less to finance the construction. Conversely, when interest rates rise, home sales slow, as does new home construction. Again, the cost to borrow money to fund these activities go up, making it less appealing to buyers or harder to afford.
The fallout from the housing crisis ten years ago resulted in policy and legislation that put more controls on how mortgages are funded, with the intent to stop predatory lending, and avoid another housing crisis. Because of this, getting a mortgage was more difficult, as the requirements and restrictions changed the terms of borrowing. As well, the housing crisis bailout affected taxes in general and how they are allocated – in this case to pay for bailout.
Taxes on the sale of a home, regular real estate taxes, and related fees also impact the cost of buying and selling a home. Federal, state, and local tax policy can all influence regional housing affordability and the ability to maintain a home. Higher taxes make it more difficult to pay for a home.
Mortgage interest rate deductions on taxes are incentives to homebuyers as they can decrease the amount of yearly taxes an individual will pay. These deductions are factors to consider when purchasing a home as the benefit may help offset the cost of borrowing the money to buy and pay for a home.
These economic factors all influence the real estate market in some way, and a basic understanding of these major economic forces can give a general idea of how the housing market works. Together, these and other variables, all influence home prices, availability, and affordability, which in turn impact individual buying and selling trends.