4 Key Factors that Drive the Real Estate Market

Investing in real estate can be very lucrative, allowing you to secure your financial future. However, in order to make informed decisions regarding your investment choices, you’ll need to know quite a bit. The most successful real estate investors not only understand the dynamics within their local real estate market, but they know the factors that drive the national real estate market and how those factors affect their decisions. Below, we’ll discuss four of the key factors you’ll need to know.

Interest Rates Run the Show

Interest rates have a dramatic effect on the real estate market. The higher the interest rate, the fewer people will be able to obtain financing to buy property. The lower the interest rate, the more people will be able to afford it, and the more competition there will be for property. With interest rate movement come changes to property pricing. Highly competitive markets see higher prices (a seller’s market), while less competition drives prices down (a buyer’s market).

Of course, this only applies if you’re interested in direct ownership. If you prefer to get into real estate investing through an REIT or another indirect ownership method, interest rates work more akin to what you’ll find with bonds or CDs. In essence, you’re loaning the fund manager or trust your money to invest, and you’re paid in interest, plus the eventual repayment of your principal.

The Demographics of an Area

You’re probably familiar with how demographics can change the prices for real estate within a specific area, but they also play a role in the national real estate market. It takes a great deal more to create sizable shifts in the nation’s overall demographics, but changes do happen. You can see such a change underway today with the rise of Millennials as one of the largest segments of the economy. Many Millennials see little point in owning property outright, and they prefer to rent. Moreover, they prefer to rent in urban centers where they can easily access shopping, dining, employment areas and more with little trouble even if they don’t drive.

Another major shift is currently underway as more and more Baby Boomers find themselves in need of downsizing their homes as their children grow up and move out. A shift toward smaller homes, or even moving to retirement communities for older Boomers is quite obvious.

How does this affect the real estate market? It changes the demand for particular types of real estate. For instance, single family homes are in slightly less demand nationally than they were 10 years ago. However, they’re significantly less in demand in areas where the Millennial population is high. Likewise, the shift of Boomers away from larger single family homes toward smaller homes or living communities has also reduced the demand for specific types of homes.

The reduced demand means that prices tend to drop. However, understand that local factors will always have a greater impact on real estate prices and the demand for particular types of property than will national demographics.

The Power of the Economy

You should need little in the way of an explanation of how the national economy drives the real estate market. You only need to look back to 2008 and the Great Recession. The real estate bubble burst and values tumbled to historic lows, leaving many homeowners with property barely worth the ink on their loan agreements.

With that being said, understand that the economy operates in a cyclical manner, and affects different types of real estate in different ways at the same time. For instance, an investment in office space could prove more resistant to an economic downturn than an investment in hotels, as people tend to work more during a recession (if work is available) and travel less frequently.

Which Is the Best Option?

You have a very broad range of options when it comes to real estate investing, and they’re far from the same. Understanding the four factors above and how they affect the real estate market will help you determine which are the best choices for your particular investing needs, from traditional rentals to REITs.