Tip of
the Month - October, 2021
THE REAL ESTATE ECONOMY
Source: PropertyManagement & Managing Risk
By: Robert C. Kyle & Floyd M. Baird, RPA/SMA
General business cycles have an
important impact on the value of real estate. A downturn in
the general business economy will mean that fewer people can
afford to buy real estate, which will decrease the demand for
real estate in relation to the supply of real estate. And if
the supply of real estate is excessive in relation to the
demand for it, the price of real estate will decline. Of
course, the opposite is also true.
Several factors affect the supply of and demand
for real estate. The state of the national economy is an
important factor because it affects employment rates, housing
affordability, availability of credit and interest rates.
Interest rates have a serious impact on the desirability of
real estate as an investment. As interest rates
increase, many potential buyers are simply priced out of the
market-real estate becomes too expensive because the required
mortgage payments increase in relationship to the interest
rates.
Local populations trends also affect the value
of real estate. A large influx of people into a
community (because of increased job opportunities, for
example) will cause the value of real estate to go up. A
decrease in population will have the opposite effect.
The demographics of that population will also affect real
estate values. For example, an increase in
retirement-age citizens will increase the value of certain
types of properties
(retirement communities) while decreasing the
values of other types of properties (large, high-maintenance
single-family homes).
Local government actions also affect real estate
values. For instance, high property taxes or poor
schools will probably decrease community real
estate values.