Real estate markets are influenced by several factors, including demographics, interest rates, and the economy. Markets are also affected by government policies and subsidies that make it easier for people to buy real estate by reducing down payments and taxes. Taken together, these factors affect supply and demand and dictate real estate economics.
The six factors affecting the real estate market are:
Demand for housing is the number of houses buyers want at various price points. In general, housing demand is determined based on a number of factors, with demographics having the most substantial impact. Demand is also influenced by income, the price of housing, cost and availability of credit, consumer and investor preferences, and other ancillary factors.
Some of the main determinants of housing demand are:
Housing supply is generated by developers and renovators and made possible by facilitators like banks. The number of new homes built by developers in any given year is generally dictated by the cost of existing real estate inventory and development expenses like land acquisition, site improvement, labor, materials, finance, administrative work, and marketing.
Demographics are the characteristics that describe a population, including race, gender, age, income, and overall population growth. In real estate economics, these factors affect markets by dictating real estate prices and demand. For example, the transition of the baby boomer generation into retirement signaled a shift in real estate markets, wherein older homeowners were interested in selling their larger homes and investing in smaller properties.
Lower interest rates give consumers the opportunity to secure more financing for home purchases. Conversely, high interest rates make buying a home less appealing because they increase the overall cost of the home. For that reason, the real estate market will typically suffer when interest rates are high — especially in the absence of favorable government policies or subsidies that make large purchases more manageable.
The real estate market is generally strong when the economy is strong; likewise, if the overall economy is suffering, real estate economics are also likely to slow. This is determined by factors like the gross domestic product (GDP), employment, manufacturing activity, and prices of goods. However, certain types of real estate with longer lease periods, like office buildings, may be less sensitive to an economic downturn.
Government policies and subsidies include incentives like tax credits, deductions, and subsidies that make it easier for people to buy homes. For example, the first-time homebuyer’s tax credit reduced the tax bill for homeowners who bought a home between 2008 and 2010. Staying apprised of the most up-to-date government incentives can make home buying more feasible for first-time and low-income homebuyers.