The real estate market is a hive of activity for incumbents and newcomers alike. In the US, interest rates are likely to remain steady into the foreseeable future, holding at 1.75%. The Federal Reserve Bank lowered interest rates on October 30, 2019, by cutting the interest rate 25 basis points to 1.750%. Historically low interest rates are the norm across multiple countries and jurisdictions, with Australia at 0.750%, Great Britain at 0.750%, Canada at 1.750%, Europe at 0.000% and, Japan at -0.100%.
Viewed in perspective, homeowners and potential homeowners have the capacity to enter the market at a time where the interest-rate burden on mortgages and long-term loans is negligible. In fact, the climate is ripe for mortgage refinancing, and home equity lines of credit (HELOC) too. Interest rates tend to whipsaw wildly based upon macroeconomic variables such as inflation, GDP, employment numbers, manufacturing data, et cetera.
In Q4 2019, the Fed slashed interest rates for the third time in the year. This move was designed to spur economic activity, following a slowdown. Interest-rate cuts are perceived as insulation for the economy, protecting against reluctance to expand operations through expensive borrowing costs. By reducing interest rates, businesses can access long-term loans more affordably, stimulating overall economic growth.
Real estate developers often operate in difficult markets, identifying threats and opportunities along the way. For example, the San Francisco Bay Area is notorious for extremely high rentals and exorbitant property prices. However, this hasn’t stopped creative developers from targeting niche markets within the Bay Area. One such developer named Danny Haber of oWOW operates in Oakland California, with a novel concept known as MacroUnits with flexible wall systems. His apartments are designed for work/life living for remote workers of all vocations. By coming in at 50% less than market price, this real estate developer is making a difference – see Danny Haber Crunchbase profile.
What Drives Real Estate Growth?
Many speculators believe that a period of long-term growth and rising prices in the real estate market will invariably be followed by a market correction. This cautious thinking can have an outsized impact on investments in real estate. It is important to understand that what happens in one part of the real estate market is largely isolated since there is no homogenous market to speak of. The real estate market in Omaha Nebraska is markedly different from that of San Francisco California, or Jupiter Florida. Pricing is often based on a myriad of factors such as supply/demand, location, desirability, work opportunities, tax considerations, and a myriad of other factors.
The real estate market per se – on a macro level – is the sum total of its components. There are arguably thousands of individual real estate markets which collectively comprise the macro market. This means that a correction in one market has little chance of impacting the entire market, unless there is a new macroeconomic reality. This is precisely what happened in 2008/2009 when the sub-prime market crisis imploded.
Of course, economic indicators provide a snapshot of the overall state of the market with things like housing starts, new construction, population growth, GDP per capita, employment figures, inflation data, and the like. As an investor in real estate, your job is simple: hold onto the asset over time and generate long-term returns on investment. That ROI invariably results in an outsized return over time.
Short-Term Real Estate or Long-Term Real Estate?
Those who are engaging in short-term transactions in the real estate market such as flippers tend to watch the markets closely. Nonetheless, the short-term duration of these types of projects usually protects these investments from significant volatility. It is wise to consider trends in the market, and how they will impact the value of investments in real estate.
Novice investors seeking to generate a quick turnaround on their capital often make the mistake of overspending. If a property stays on the market for too long, it needs to be paid for with the owner’s own funds. This can create a ‘debt trap’ if the market suddenly cools. The good news about the property market is that it can generally withstand many fluctuations.
Real estate professionals routinely provide tips, tricks, and strategies for enhanced profitability. Sellers can maximise ROI when strong demand characterizes the market. Value is further affected by a variety of factors including the political climate in the region, zoning requirements, and demographics. Before any offer to purchase is made, buyers should adopt a comprehensive approach to the process.
A reputable home inspector should be employed, with verifiable credentials, to fully inspect the property for any patent faults, defects, and problems. If it’s your first home, there’s no pressure to sell your existing home in order to close on the new sale. Take your time and think strategically to make the best decision. If you have an existing property to sell, it’s wise to make the purchase offer contingent upon the sale of your existing property.
That way you don’t have to do be on the hook for multiple properties. Sometimes, it’s the properties that have been on the market for quite some time that become the most lucrative investments. Buyers may overlook properties that have been listed for too long, to their detriment. Investigate the reasons why properties haven’t sold – it may be part of a greater trend in the market. All it takes is one good investment to make the world of difference to your real estate portfolio.
