For some, the real estate market has been profoundly confusing. No one could anticipate, after all, the radical impact the pandemic would have on the market. It seems like real estate is frustratingly stubborn in the face of attempts to quell raging prices. The seeming unpredictability of the real estate market may deter some people from joining the fray as buyers and investors.
Once you know why things are the way they are, you empower yourself to make wise, informed decisions.
In our effort to guide and educate real estate investors of all experience levels, we’re here to break down the five most significant influences on property prices.
Major Factors That Determine Real Estate Prices
1. Location
Many factors influence why particular locations are cheaper or more expensive than others. Land availability, population density, median household income, and population growth are just a few. For real estate investors, targeting the right market is essential. Southern and midwestern markets tend to be more affordable than either East or West coasts.
At the same time, not all affordable markets have a growth trajectory or adequate housing demand. Look for modest, steady year-over-year growth (population, property prices, income, etc.) as an indicator of investment potential.
2. Supply & Demand
Right now, supply and demand may be the single most potent factor impacting the state of the real estate market. Throughout the pandemic, demand surged to insatiable levels. It’s why we saw months’ supply drop beneath two months. We’re still struggling to get it above three – and that’s HALF of what’s considered a healthy supply!
At the same time, inventory, as we’ve noted, has lagged since the Great Recession. The devastated construction industry never truly recovered, and they’ve been playing catch-up ever since. That’s not to mention the reduction of existing inventory as fewer households put their properties up for sale, particularly during the beginning of the pandemic and especially as buying grew less feasible.
Short supply is why the housing market has been so stubborn despite movement in the other factors on this list.
3. Interest Rates
As of the beginning of May 2023, mortgage interest rates are nearing 7%. Part of the Fed’s strategy to curb inflation is to increase interest rates. When we observe historical interest rates, we understand why people are making such a fuss. Interest rates haven’t been this high in over a decade, with rates last above 7% in 2002. Since the Great Recession, rates have steadily declined. In 2020, they dipped under 3%.
That means we’ve seen a 4% jump in just two years. Not only is this a comparatively large jump, but homes cost significantly more thanks to inflation. Every percentage point could mean hundreds, if not thousands, of extra dollars on your monthly mortgage payment.
Typically, raising interest rates curbs property prices and results in correction. Because of short supply, that hasn’t been the case in much of the market.
4. Construction Costs
Why do we see such a shortage of new properties for first-time homebuyers? Where housing affordability is concerned, this may be our most painful issue. Even as new inventory makes it to the marketplace, first-time buyers still aren’t able to participate. Prices are just too prohibitive.
This is because the cost of labor and construction materials increased, especially throughout the pandemic supply-chain disruptions. For builders to profit from new construction, they must price properties with their profit margins in mind. The cost to build is directly passed on to homebuyers.
This is also why we’re seeing a rise in the popularity of the build-to-rent model. Renting comes with fewer cost barriers, the perks of new construction, and profit for builders and owners.
5. Economic Health
The health of the local, national, and global economy impact the housing market. Home prices tend to increase when the economy is thriving because increased GDP, job security, and consumer spending encourage people to take on mortgage debt. By contrast, poor economic performance and high unemployment tend to reduce homebuying activity. This drop in demand usually results in reduced property prices.
With that said, supply really is the issue of the day. So many of these factors are stacked against homebuyers, but properties aren’t nearly as affordable as they should be. That’s because supply is that tight. Diminishing demand hasn’t balanced out the property shortage. It’s unlikely we’ll see a significant shift in market pricing until we have enough supply acting as the catalyst for change.
Our available properties are designed to stand the test of time, producing passive income for years to come!
