The 7 Fundamentals of a Great Real Estate Market
By JD Esajian on July 31, 2015
What makes a great real estate market today?
As more real estate investors join the hunt for markets that can deliver on returns, it is important to stay tuned into what makes a great market. Not all of the most expensive neighborhoods in the USA are necessarily good deals. Not every dirt cheap, foreclosure dense city offers security and real value. So what makes a smart market to invest in?
1. Earnings
Earnings are important. They directly impact affordability. When surveyed on the single most important factor affecting and predicting future performance of any market, a panel of global investment analysts said it was affordability. Affordability means room for growth, sales activity, and gains in income and equity. In the long term, lack of affordability can also negatively impact public services, schools, law enforcement, and more. The dynamics of jobs and wages, and their relationship to affordable housing, and real estate growth has changed. The globalization of real estate, remote working, the rental economy, vacation rental explosion, and real estate as a tool to stash wealth is changing the ties between the local jobs and property prices. It is now completely possible for small pockets of the market to be supported by freelance workers, the global elite, and wealthy vacation renters. However, markets will still be affected by earnings. If a demographic that dominates an area sees their wealth and investment returns, or industry hit hard, that will impact it on all fronts. Although larger amounts of cash and equity in properties can prevent a downward slide in values. For lower end markets, jobs and wages are still critical points to watch out for.
2. Population
Population growth is a great predictor of real estate sales volume, and house price growth. If the population is shrinking, there is less demand for housing. That can have a negative effect. Where population is booming, there is more competition, and that’s great for owner, investors, and Realtors. Some of this has to do with age of the population, but also is linked to many of the factors below. Look up the history of population growth in a city, and that may tell you a lot about the future. Some have seen census counts up and down, or even negative. Others show straight increases for decades or hundreds of years. They have proven to be resilient, even in tough times.
3. Trendy
Trendy cities attract a lot of short term growth. This can be great for house flippers. San Francisco’s SoMa neighborhood, Miami’s Wynwood Art District, Downtown San Diego, and NY’s Brooklyn are all great examples of this. However, to be sustainable, these neighborhoods do need to check some of the other boxes on this list too.
4. Visibility
Visibility is critical to ongoing growth. It doesn’t matter how cheap the property, how nice the property, or the value, if no one knows about it. Familiarity also delivers trust and confidence. And that builds growth. Obviously in some cases owners may not want the whole world to know about their sweet spot. That just attracts more tourists and pumps up their own taxes. But it should at least be famous in your niche. Naples and Destin, FL, and Encinitas, CA are a good example of havens of the wealthy. NYC, Miami, and San Francisco are examples of world famous cities.
5. Good Internet
Now that your grandmother doesn’t want to be caught out anywhere without her iPad or Facebook every happening destination has to have great internet. And we’ll increasingly see real estate markets separated by the percentage of the population that is online, and how fast their speeds are. After all; in today’s digital economy it doesn’t matter if you can buy 20 acres for $1,000 if there is no internet service available.
6. Financing
The last decade has been great for cash real estate sales, and cash equity being pumped into the US housing market. But if we are to see continued growth from here we need financing. Unless property owners can tap pent up equity, and buyers finance new purchases sales and value growth will be slow. Many individuals don’t realize that there is a significant disparity in where lenders will lend, and the terms they will offer. If they haven’t heard of your destination, or mortgage fraud has been too high there – they will make excuses not to complete the funding of loans, or will offer inferior loan terms.
7. Lifestyle
This is perhaps one of the most underestimated of all the real estate market fundamentals that most measure. And many media outlets completely overlook it. Weather, activities, visual appeal, cost of living, and more all determine how desirable it is to live somewhere. In the long term this may have the biggest impact. The areas with the best lifestyle will be magnets for growth.