Six (6) Economics That Affect Real Estate Market

Six (6) Economics That Affect Real Estate Market

factors affecting the real estate market

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:

1. Housing Demand

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:

  • Demographics
    Demographics are data about the makeup of certain populations; in real estate, these data focus on household characteristics like family size, age of residents, number of children, death and divorce rates, and marriages. However, general population and population growth are also demographic considerations; there will be a greater demand for housing where there are more people.
  • Income
    Housing demand is also affected by income because someone with a high and stable income is more likely to purchase a home or invest in other real estate. In real estate economics, analysts look at permanent income — or the way income and spending are spread out over a lifetime — rather than annual income. This is due in large part to the high cost of real estate and, therefore, the need for consistently high income to purchase property.
  • Price of Housing
    The price of housing also factors into housing demand because it determines how many people can afford to invest in the market. Generally speaking, the higher the price of housing, the lower the demand. Housing prices are generally based on factors like the current inventory — or supply — of housing, location, and interest rates.
  • Cost & Availability of Credit
    When interest rates are low and lending standards are more relaxed, the demand for real estate generally increases. This is because it is cheaper and easier for consumers and investors to get real estate financing.

2. Housing Supply

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.

3. Demographics

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.

4. Interest Rates

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.

5. The Economy

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.

6. Government Policies & Subsidies

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.

Need more information about other factors affecting the real estate market? Call us now at CPD Homes, LLC and we’ll be more than happy to help you! Feel free to contact us at 216-619-4387, or visit our website for more of our products and services!

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