The real estate market can be incredibly daunting for prospective investors and home buyers. The subtle upward and downward economic trends that can translate into booms and crashes are seemingly arbitrary. Like many industries, a lack of knowledge has created inequality among those who wish to navigate the ever-changing market. The truth is, the basic economic principles that shape the real estate market are relatively accessible. Understanding their role in shaping home prices can be an immensely valuable asset. The following will begin by discussing the macroeconomic concepts that shape the real estate market such as supply, demand, and interest rates.
The law of supply and demand is one of the most fundamental concepts in economics. Its theory explains the relationship between supply, demand, and price. As the demand for a good increases, the price of the product increases. However, if the demand for a product does not meet the supply, the price will fall. If a product’s demand is greater than the limited supply, then the product is considered to be in shortage. Conversely, if the supply of a product exceeds the demand, there is a surplus of this product. Typically, a “seller’s market” would be characterized by low supply and consequently high demand. A typical “buyer’s market” consists of high supply with limited demand.
In real estate, several factors play into the supply and demand of houses. Supply can be influenced by developers and resellers. The availability of land and existing homes to renovate both dictate the supply of homes on the market. Demand has a variety of factors of influence. These include demographics of a particular area, income, cost, and credit availability. The demographic profile of a particular area is one of the greatest determinants of demand. A house located in a rural area detached from the city will have significantly less demand than a home located next to a major highway. The price of these two example homes will be reflected in the corresponding demand. The home closest to the highway and city will drive the higher price.
Interest rates are also a large part of the macroeconomic factors impacting the real estate market. They are considered monetary policy and are regulated by the federal reserve.
Interest rates are the rate of interest a person pays on loans from the bank and include mortgages. As expected, when interest rates are low, more people are able to afford a mortgage and purchase a home. In turn, as interest rates go down, demand goes up in the housing market. When interest rates are high, fewer people can afford a mortgage, and demand decreases. The federal reserve sets these interest rates to create and maintain economic growth. Low-interest rates speed up economic activity whereas raising interest rates slows economic activity in the event of inflation. In today’s current market, interest rates are still exceeding low. The lowering of interest rates during COVID-19 served to boost economic activity in the market when activity was being suppressed by stay at home orders. Now that the state is reopening, demand is naturally rising in the real estate market. The rise in demand coupled with the low-interest rates means it is a great time to sell your home.