The local real estate market is often influenced by various economic factors at the national and global levels. The overall state of the economy has a significant impact on the real estate market as it affects the ability of buyers and sellers to participate in real estate transactions. Economic growth, interest rates, inflation, and unemployment are some of the factors that can influence the real estate market.
Economic Growth
Economic growth is an essential determinant of the local real estate market. The economy’s growth can lead to higher employment rates, increased income, and an overall improvement in the standard of living, making real estate investments more attractive to buyers. When the economy is booming, real estate markets are more active, with more people able to afford homes or investment properties. Conversely, when economic growth is slow or stagnant, the local real estate market may experience a decline in activity as people may not have enough income to make purchases, and investors may be hesitant to put their money into the market.
Interest Rates
Interest rates also play a crucial role in the real estate market. When interest rates are low, borrowing becomes more accessible, and mortgage rates are affordable, which leads to more people entering the market. This increased demand can drive up real estate prices, which benefits sellers. On the other hand, when interest rates are high, borrowing becomes expensive, and many people may be unable to afford mortgage payments. This results in lower demand and can cause prices to decline.
Dr. Marci Rossell, Chief of Economist of Leading Real Estate Companies of the World: “The Federal Reserve reports that Q4 2022 saw mortgage originations fall to $498B, down from their 2021 peak of $1.2T. While this represents a significant drop, it is simply a return to 2019 numbers, albeit at slightly higher mortgage rates. Given consumer trends, Dr. Rossell observes that homebuyers and sellers alike currently appear comfortable transacting when mortgage rates are between 6% – 6.5%.”
Inflation
Inflation is another factor that can affect the real estate market. When inflation is high, prices of goods and services increase, which can lead to higher wages and salaries. This can make it easier for people to afford homes, which can drive up demand and prices. However, high inflation can also lead to higher interest rates, which can make borrowing more expensive and reduce demand in the real estate market.
“As of mid-February inflation was down to 6.1%, a disappointing 0.1% decrease from January. While food prices remained steady, energy prices saw a slight increase in January. “Shelter” prices, which include rent, home sale and hotel rates, remained high through January. Currently-elevated hotel pricing is due in part to ongoing post-pandemic pent-up travel demand, meaning hotel rates are likely to normalize throughout the year. Anticipated rental builds coming online in 2023, including plans for a 500K+ unit project, will help ease rental prices by year-end. In the meantime, the Federal Reserve is likely to take rate hikes to 5% – 5.5% in the coming months, consistent with a mortgage rate between 6% – 7%, with Fed rate cuts commencing only once inflation dips back down to 3% – 4%, a reasonable likelihood toward year’s-end.” ~ Dr Marci Rosell
Unemployment
Unemployment is a significant factor that can impact the real estate market. When unemployment is high, people may not have the income to purchase homes or invest in real estate. This can result in lower demand, which can cause prices to decline. Additionally, when unemployment is high, there is a higher likelihood of defaulting on mortgage payments, which can lead to foreclosures and a glut of homes on the market.
Overall, the health of the overall economy has a significant impact on the local real estate market. Economic growth, interest rates, inflation, and unemployment are all factors that can influence the market. When the economy is thriving, people have more income to invest in real estate, and demand is higher. Conversely, when the economy is struggling, the real estate market may experience a decline in activity as people have less money to spend on real estate purchases. Therefore, it is crucial for buyers, sellers, and investors to keep an eye on economic indicators when making decisions about real estate transactions.