Real estate prices often fluctuate. Some factors change month-to-month, like supply and demand in an area and the nation’s unemployment rate. Other aspects that influence prices, like the property’s location, don’t change much over time but still play a significant role in financial value. If you are preparing to buy or sell a home, it is crucial to understand what causes these changes to plan accordingly.
This article will explain the factors that cause real estate price increases and illustrate the best time to make a real estate purchase or sale.
You’ve probably heard the saying “location, location, location” if you’re buying or selling a home. The location of the property directly impacts its price.
The most important local elements people search for when purchasing real estate are school districts, proximity to hospitals and highways, and crime rates. The price per square foot of a simple three-bedroom home could be twice as much in a quiet suburb near an elementary school as it would be on a busy street in an area with a lot of crime.
There are some instances in which real estate prices in a specific location change over time. For example, if a neighborhood introduces more schools and local businesses, the median list price will likely increase because buyers usually look for these features.
Local Supply and Demand
Like with any good or service that is bought and sold, the laws of supply and demand play a significant role in the price of real estate. When there are more buyers than sellers in the real estate market, the cost of homes will increase because there is high demand and low inventory. Local supply and demand can change drastically year over year.
The inverse is also true. Market data shows that if there is a low demand for single-family homes and several properties for sale, prices will fall because fewer people are buying. Real estate takes longer to sell during low demand and high supply, also known as a seller’s market.
Mortgage rates have an impact on the real estate market, both for home buyers and sellers. An interest rate is a percentage a buyer must pay each month in addition to their mortgage. As rates rise, the demand for homes decreases. This decline occurs because high-interest rates mean that a buyer spends more money on their mortgage in the long run.
High-interest rates don’t just affect buyers. During periods of high-interest rates, many potential homebuyers turn to rent until rates decrease. Ultimately, this weakens demand and leads to lower real estate prices, so sellers receive less for their homes than they would when interest rates are low.
Economic Growth or Decline
Economic growth is synonymous with job security, salary increases, high manufacturing activity, and a steady increase in the price of goods. When people consistently earn money without the threat of job loss, they are more likely to take on a mortgage payment. Home sales increase during this time, raising property values. A growing economy also means more disposable income, so those in the market to purchase real estate may spend more than they would in a recession.
A recession is an extended period in which gross domestic product (GDP), a measure of all goods and services produced, declines. GDP includes employment rates, income, and overall production. When a recession occurs, real estate prices drop because many potential home buyers face economic uncertainty.
Unemployment relates to economic growth and decline but plays a crucial role in real estate prices. The unemployment rate measures the number of adults in the United States who are available and actively seeking work but are not currently in the workforce. Many things can cause a fluctuating unemployment rate. These factors are usually related to the overall economy, such as a large number of layoffs.
Most economists consider an unemployment rate of 4-5% average. If it rises above 5%, it’s indicative of high unemployment. When the unemployment rate is high, it means that many people are not in the market to buy a home. As you read earlier, fewer potential homebuyers lead to fewer homes sold and create a buyer’s market, which decreases housing prices.
Whether you are looking to buy or sell a property, any one of these elements can drastically affect the price of real estate. Therefore, it is vital to research changing interest and unemployment rates before making any real estate decisions. Local factors that affect the price of homes, like supply and demand and location, can vary by city.
We understand that the real estate market can be complicated, and you may not know whether it’s an optimal time to buy or sell a home. The good news is that our experienced agents at The Katie McNeill Team can help you with any questions or concerns about the current housing market. If you are preparing to buy or sell a home but are unsure if it’s a good time based on the factors mentioned, contact us to speak with a real estate agent.