Real Estate Market Tips

The price of real estate, like the price of anything else, is driven by supply and demand. The smaller the supply and the greater the demand, the higher prices should spiral. When the supply of housing can easily expand at a very fast rate, prices struggle to rise.

In the long term, the lack of land to build upon in an area can prove to be a problem. Too high real estate prices may cause employers and employees to relocate to less expensive areas. If you’re looking to invest in real estate in an area with little land to build and sky-high prices, run the numbers to see if the deal makes economic sense.

In addition to land that you can build on, here are some other important real estate market indicators to give you a sense of the health, or lack thereof, of a particular market:

1. Building permits. The trend in the number of building permits tells you how the supply of real estate properties will soon be changing. A long and sustained rise in permits over several years can indicate that the supply of new property will dampen future price appreciation. Many areas experienced enormous increases in new building during the 1980s, right before prices peaked due to excess inventory. Conversely, new building dried up in many areas in the late 1970s and early 1980s as builders and developers were strangled by onerous interest rates.

2. Vacancy rates. As with building permits, low vacancy rates generally bode well for future real estate price appreciation. If few rentals are vacant, that means more competition and demand for existing units. That’s a good sign for investors. Conversely, high vacancy rates indicate an excess supply of real estate, which will put downward pressure on rental rates as many landlords compete to attract tenants.

3. Listings of property for sale and number of sales. Just as lots of new buildings being built is bad for future real estate price increases, increasing numbers of listings of properties for sale is generally a problem in the making. As property prices reach high levels, some investors decide it’s worth cashing in and investing elsewhere. When the market is flooded with listings, prospective buyers can be choosier, exerting downward pressure on prices. At high prices (relative to the cost of renting), more prospective buyers elect to rent and the number of sales relative to listing drops.

A good sign is a decreasing and low level of listings of property for sale. This lack of listings indicates that the demand from buyers meets or exceeds the supply of property for sale from sellers. When the cost of buying is relatively low compared with the cost of renting, more renters elect and can afford to purchase, thus increasing the number of sales.

4. Rents. The trend in rental rates that renters are willing and able to pay over the years gives a good indication as to the demand for housing. When the demand for housing keeps up with the supply of housing and the local economy continues to grow, rents generally increase. This increase is a positive sign for continued real estate price appreciation.

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