You know the old saying that real estate prices are local. What is happening in one area of the country has no impact on another area and so forth. While overall this idea rings true, there are some exceptions to the saying. In fact, there are some common factors that drive the real estate market, no matter your location.
What are these factors? In this post I’ll look at the 5 factors that drive the real estate market and why they affect home prices throughout the country.
5 Vital Factors That Drive The Real Estate Market
#1. Supply And Demand
Supply and demand is an important factor of the real estate market. While this factor can be local, in terms of a lack of supply in a city so the demand for housing is high, it can be national too.
For example, if lumber prices rise or tariffs are introduced on the material to build a house, this is going to affect the pricing of new homes. If prices go too high, demand falls and then builder stop supplying new homes to the market.
#2. Interest Rates
As a whole, interest rates drive the real estate market. When interest rates are low, people tend to be more likely to buy a house. This is because they can borrow money more cheaply.
However, as interest rates rise, there is not an immediate slowing to the real estate market. This is because interest rates tend to move slowly, so buyers have time to lock in rates.
With that said, in times of very high interest rates, you will see a slow-down in the real estate market at buyers simply cannot afford to borrow money at such a high rate.
#3. The Economy
A bad economy is an obvious detriment to the real estate market. Just look at the housing collapse in 2008 as a prime example. People were losing their jobs and struggling to make ends meet. When this is happening, the last thing you are thinking about is shelling out thousands for a new home.
And even if you didn’t lose your job, borrowing a couple hundred thousand dollars wasn’t interesting either. You were too worried you might lose your job as well and as a result, would rather build up your savings account.
As the economy turns and people are more confident in the stability of their job, then they will begin to slowly entertain the idea of buying a house.
#4. The Stock Market
Since most of people’s wealth is tied to the stock market, this too is one of the factors that drive real estate. If the market crashes, then people won’t have the money to pay for a down payment. Or, in the case of 2008 again, they are so fearful of losing more of their money they would rather save it than spend it.
But as with the economy, as the stock market picks up steam, people gain confidence and begin to look into buying houses again.
#5. The Government
The final important driver of real estate is the government. They can create subsidies or even change policies to spur or slow down the real estate market.
Again using 2008 as an example, the government introduced the $8,000 homebuyer credit to help people afford a home. Then they created the HARP program to help people refinance so they could afford to sell their home and eventually buy.
While neither of these had a tremendous impact on the real estate market, they did have an impact nonetheless. I know of a handful of people that made real estate transactions simply because of these policies.
The government also offers loan programs to help people more easily afford to buy a home. All of these factor into the price of real estate.
Overall, there are many factors that drive the real estate market. While many of the examples given were from 2008, that was a critical point in time for real estate. You had many factors come together to influence home starts, sales and prices. Usually there isn’t a perfect storm like this.
But at the end of the day, while real estate is local, there are factors that have an influence over the entire country.