In the United States, Real estate stands for a significant portion of the wealth of most citizens. Especially for a lot of homeowners in the country. A recent Survey of Consumer Finances revealed by the Federal Reserve, the percentage of American families who are owners of their own place of residence were 65.1% in 2019.
The Real estate market is a huge, attractive, and lucrative sector. And we will be considering the main factors that drive real estate market and the diverse availability of investments.
Here Are Important Factors That Drive Real Estate Market
Demographics reveal the composition of age, gender, race, growth of population, income, migration patterns, etc. These statistic is very crucial to the real estate market, how it is priced, and the kind of property-demands available.
This factor can impact majorly on real estate trends for multiple decades. An instance of a demographic trend that significantly influences real estate is the 1945 and 1964, baby boomers. While this factor is very cogent in real estate, it is however often overlooked on how it is priced, and the kinds of properties that would be demanded. The key shift in a nation’s demographics can impact hugely on the real estate market trend for many decades.
The transition of the 1945 and 1964 baby boomers into retirement, is a very interesting feature of a major generational trend that occurred in the last hundred years. The retirement of the baby boomers started in 2010, and it would be a major influence in real estate for decades ahead.
While this factor can affect the real estate market in several ways, there are important questions an investor would be keen to ask. Here are some;
i) How would this demographic shift impact on second homes’ demand a situation where the income is very small and the children are already out?
ii) How would this factor impact on larger homes if incomes drop significantly and all the children have moved out?
With more questions like these, a potential real estate investor can narrow down the kind and location of possible desirable real estate investments for a long time even before the trend has begun.
What quality local schools have is often the leading important factor for buyers who have children who are in the age of going to school. Another factor that is often considered is the proximity of the location to local employment opportunities. This is a high priority for buyers of employment age.
Another thing is the proximity to shopping, social, and recreational centers. This is largely considered by young buyers and is also a vital pricing factor for most homebuyers.
And all these factors aren’t independent of one another. For instance, most parents would want to drop their children while going to work and also pick them upon return. Hence, proximity to school, work, and shopping or entertainment are the three determinants of how valuable a property location is.
And if you’ll be getting two out the three, then there should be some commensurate prices and stiff competition. And in a case where all three are available, may demand a small war chest to be able to fund your home-buying exploits.
2. Report On Inspect
In the situation of some hot markets, prospective buyers may let go off their right to receive an inspection report which is a risk which most mortgage lenders will not underwrite. As far as most buyers are concerned, mortgage financing is vital on a very considerable inspection. For instance, the bank will not give you loans on a termite farm.
The inspection reports can influence the price of homes even if a home is under contract. And this is often downwards as the potential buyer begins to find out more issues that require repairs. A buyer has more room for negotiation when there are more recommended repairs on the inspection report. And the seller most reveal the inspection report to interested buyers in future if the deal falls which pushes further for a chance for the piece to be given out at the original price listed.
The state of California has no licensing or certification for inspectors. This makes inspections a case of a wild west. Many experienced inspectors usually carry Erro & Omissions (E&O) insurance to cover themselves in the possible situations of errors made. And when this insurance is absent, it signals a red flag. You can find a trustworthy inspector through referrals from families, friends, and real estate agents and contacting references from past customers of an inspector.
3. Appraisal Value
The appraisal value is the formal process for determining a property’s price in the real estate industry. All states are expected that appraisers should be licensed or certified by an organization that is accredited by the Appraiser Qualifications Board (AQB). And when lending is involved in financing the purchase of a property or home equity borrowing, it is often required that an appraisal is done. Most lending organizations will not give approval for loans beyond the appraised amount.
This means that if the assessed value drops lower, then the seller may be required to reduce the price or the buyer would have to add more funds to the reduced loan figure. And if the appraiser suggests that there is a structural issue, such as termite damage or faulty roof, the loan won’t be approved by the bank until the issues are properly attended to. The expense largely falls on the seller.
Appraisers often go through a structured process to determine what a property worth. They look at the recent comparable sales for a benchmark price and then make an adjustment of the prices upward or downward based on the improvements and upgrades available and or not as relative to comparable properties.
4. Upgrades And Updates
Most potential home buyers would rather go for a move-in ready home, unlike many other buyer who would seek actively for fixer-upper properties. And these potential home buyers are willing to offer a reasonable premium to get that comfort for themselves.
For instance, a newly constructed roof generally recovers about over 80% of its value when it gets sold. The National Association of Realtors has disclosed that kitchens and bathrooms that are upgraded are among the most crucial upgrades which homebuyers cited. And this is because they represent a key expense and worry to buyers when they have to do the upgrading themselves.
Remodeling magazine offers regional reports which are rich in data to help comprehend regional variations on how to upgrade investments recover their value. For instance, manufactured stone veneers and steel entry doors give Pacific coast homeowners the best bet for their cash when their properties are sold.
5. Neighborhood Comps
‘Comps’ are Comparable properties. When they are sold in an area, they impact that area’s home’s market value. Real estate agents and appraisers consider the recent sales of homes with common features to use as a determinant on the potential price of homes. But short sales and foreclosure often make things more difficult because they tend to reduced prices. This decreases the neighborhood’s total average sales price.
Comparable properties, together with offer details, are often major appraisal process drivers. Even most appraisers will be heavily dependent on recent transactions on nearby homes with striking sizes to yours.
Here Are Macro-Factors That Affects The Prices Of Homes
6. Interest Rates
The ‘Fed interest rate’ which usually means the Federal Reserve overnight borrowing rate for depository institutions is a leading factor on the determinant of mortgage rates as it impacts the cost for loans offered by banks. When Fed interest rates are lower, it leads to the mortgage rates that are reduced from banks. This also decreases the amount of monthly mortgage a homebuyer must make for a particular mortgage amount.
When the monthly payment is smaller, it makes a loan to a prospective homebuyer more affordable. This factor can be a potential cause for an increase in the size of eligible mortgages for homebuyers to receive to increase property prices.
The Fed Interest rates are currently at near-historic lows, however, the Federal Reserve has given hints on a hike in the rates of Federal funds at the year-end. This would also impact on mortgage interest rates. But many experts do not believe that any rise in Fed interest rates will make any major impact on the prices of residential properties because economic factors such as income constantly strengthen especially in California.
7. Indicators In The Economy
How strong the total economy is a significant factor that affects the real estate market as the ability of consumers to support housing prices is depended on some major factors such as unemployment, GDP, and growth of income. The era of the Great Recession which occurred between 2008 and 2012 underscored the connection between the larger economy and real estate.
There was a significant fall in property prices experienced by local economies that have a large number of jobs related to real estate – whether mortgage financing or construction. Other local macro-trends can outsize in importance to the national factors. For instance, the income growth rate in California came in at 1.2% during 2015’s first quarter as compared to the national average of 0.9%, which impacts on a rise in real estate prices as potential buyers have the ability to spend more on housing.
Investors are constantly looking for profitable areas to invest in. The crisis in a housing made room for an alluring environment for potential investors who have a longing for residential real estate. The rise in foreclosures and short sales offered foreign and domestic investors with privilege to grab expensive properties for rent or renovation to be sold at a profit.
A recent National Association of Realtors research reveals that the home purchased by investment buyers has a percentage of 20% in the market. And as there is a significant drop in distressed properties, there would be slow pace in the market as purchases are wind down by the parties. This would cause investors at some point, to try to liquidate some of their property holdings. This would result in several homes getting into the market all at once if not rightly timed.
Other Factors Driving Real Estate Market
There are some more factors that determine what appearance the real estate market takes. Some more are highlighted below:
I. The activity of local builder, local regulation, and zoning restrictions affects the supply and prices of homes and react to too little or too much supply.
ii. Mortgage interest tax credit has a great effect on the values of homes. This brings free cash for homeowners and increases the prices of properties up to 25% by making adjustments on the perceived affordability of the prices of the homes.
iii Nearness of considered location to playgrounds and parks, crime, noise pollution, air quality, light pollution, traffic volume, quality of internet connection, roads, and so much more. Homebuyers have their personalized list of services and other features that are specifically important to them.