4 Factors That Define A Real Estate Market
By JD Esajian on May 11, 2015
There is always interest in which way the real estate market is moving. How the market moves impacts where, when and how we buy. If you turn on the news or read the paper, there are always stories about the strength or weakness of the real estate market. Even if you are not in real estate, the market has an impact on your life. Much is made about the market, but few people know what it really is. The simple answer is that it is a combination of a many different things. Some directly pertain to you and your business while others have little to no effect. Here are the four main factors that define a real estate market.
1. Location: What happens in California has little impact to an investor in Connecticut. There may eventually be some ripple down effects but those two markets are not the same. Every investing area is a market into itself. There are little nuances that make each investing area different. This is based on supply and demand and demographics. The demand for swimming pools in New Hampshire is often not as great as in warm weather states. As a general rule of thumb if the demand is low the market will be weak. Demand is based on the desirability to live in a certain area. Going one step further desirability is based on items such as annual taxes, employment & crime rates and cost of living. As you can see two local areas, even in the same state, can be completely different. Take a look at where you invest and evaluate the supply and demand. If homes have been on the market for a prolonged period of time the demand is low. If they are selling as soon as they are listed you have a hot selling market. News on the national market is not nearly as important as information on your local area. Where you invest is what should be important to you.
2. Type of Property: Different types of properties can be a market unto themselves. Many of the lending guidelines for multifamily properties have changed over the years. This has created a reduction in demand for these types of properties. Even in a seemingly strong market the submarket for a three family property can be weak. In any given area a condominium will hold different appeal than a single family house. A commercial building has a different market than a mobile home. There are different requirements for every type of purchase. Some require a greater down payment, higher credit scores and other criteria over others. The more restrictive the guidelines are the less demand there will be. A commercial building requires significantly more due diligence than a single family FHA purchase. Looking at the property location is not enough to define a market. You also need to know the type of property you are buying.
3. Perspective: Whatever side of the market you are on is how you form your perspective. If you owned rental property over the past few years you would say that the rental market is strong. There has been more demand to rent than in any time in the past decade. This has pushed rental amounts to record highs. If you were trying to sell in a slow market you would say your market is weak. On the flip side this is a good time to be a buyer. Whatever side of the transaction you are on shapes your view of the market. It is important to know what side of the transaction has the leverage. Listing a property at top dollar in a market where supply is high may lead to it going unsold for a while. If you know which way the demand is it will impact your decisions. Which side you are on will directly shape your perspective of the market.
4. Trends: One of the common phrases about real estate is that it is “cyclical”. This is just a fancy way of saying that it works in cycles. It is no secret that we are currently coming off of low in the market. The recent collapse threatened to bring the economy to its knees. The reason many investors were optimistic is that they looked at past trends and assumed the market will go up again. Past performance shouldn’t be the sole indicator but it can give us an idea of what will happen next. Areas where employment is robust and new houses are being built are the first places that will recover. In time market trends say that buyers will begin to create demand that will force home prices higher. If employment and personal savings improve buyers will look to buy instead of rent. This demand may lead to lenders softening their guidelines to attract business. This is what has happened in the past and has a good chance to happen in the future. Trends make up a lot of what has and will happen in your market.
There is no predicting which way the market will go. It is important to know which market is being referenced when you are discussing it. How the national market moves doesn’t guarantee it will happen where you invest. Knowledge of the market takes a little due diligence on your part. Take the time to know what items impact how it moves. If you can be a master of your market you will be a better investor.