Real Estate Market Triggers
For seasoned real estate investors, certain market influences and indicators are the driving force behind their purchases and sales. Less experienced investors might not know or understand these influences and miss opportunities as a result. Let’s explore the market triggers that real estate investors should understand to be successful.
Economics and Social Economics
The US economy is the main driving force in both residential and commercial real estate markets. When the economy is stable or on the rise there is always an influx of buyers of all types of real estate. This is what is commonly referred to as a “Seller’s Market”. A seller’s market is when the demand is higher than the supply of available properties. This allows sellers to list and sell their properties at a higher value. A seller’s market can also induce bidding wars between buyers, allowing a seller to sit back and wait while buyers vie for “Highest and Best Offer” to be accepted by the seller.
When the economy is experiencing a downward trend, real estate markets will show a corresponding cooling trend. A cooling trend can quickly transform a seller’s market into a “Buyer’s Market” as demand goes down and supply goes up. This gives buyers more control of negotiations, often leading to lower than asking price offers on properties. Cooling real estate markets also include a rise in foreclosures and short sales, leading to a steady supply of below market prices for buyers to choose from.
Social economics also plays a part in the rise or fall of any real estate market. A key market indicator in any area is often the steady rise of the median household and business income. During a market upswing, many households and businesses use their increased incomes to invest in real estate. Residential home sales rise as households feel a pleasant increase in their income.
Saturation of the local market is a key trigger for real estate. Market saturation is when the amount of inventory or volume on a particular property type has been maximized or reaches its peak. When there is an influx of a particular property type for sale, referred to as an oversaturation, the buyer has many more options for the property location, size and price.
In an oversaturated area an investor can buy properties at lower prices and hold them until there is a higher demand. This allows investors to hold onto their properties long-term while the market value of their real estate increases.
Taxes and Government Policy
Nobody wants to sit up at night and read up on current real estate tax changes and government policies, but being familiar with these items is key to being a successful investor. New laws, at the local, state and federal level, as well as tax changes can make a huge impact on real estate markets. Tax cuts can create more jobs and increase the number of first-time investors which, in turn, creates an upswing in a real estate market.
Just as positive changes to tax policies and laws can have a positive impact on any real estate market, they can also create market downturns just as easily. It is imperative that real estate investors, whether new or experienced, stay engaged and knowledgeable about tax and policy changes at both the local and national level.