The real estate market goes through natural ups and downs, like a wave. By understanding some key rules that govern these cycles, you can limit the risks you face as a real estate investor.

LAW OF VALUE

Real estate, unlike many other assets, is intrinsically linked to our lives. From the moment we’re born to where we live, work, and even our final resting places, real estate plays a vital role. This inherent necessity drives its value. 

The more uses a property offers, the more valuable it becomes. Think of a mixed-use development combining residential and commercial spaces, conveniently located near amenities. This type of property is more likely to become highly sought-after compared to a single-family home far from convenience. It also means the more benefits a property provides, the higher its potential selling price and the easier it is to sell. 

While location and property type are big players in real estate value, there is more to the story. Appraisers don’t just look at the property itself. They also imagine a normal buying and selling situation and question “what price would a well-informed buyer be willing to pay and what price would a reasonable seller be happy to accept?” to predict how the market operates. 

Market swings can dramatically impact property values. Take New York in 2020. When COVID-19 hit, suburban and rural areas became buyer’s markets, with lower prices and less competition. Mihal Gartenberg, a real estate broker with Coldwell Banker, told Forbes, ‘that really shifted, and they became seller’s markets in spring 2020.’ [With NYC], by spring and summer 2021, you could feel the shift in the air. By fall, we were a full-on seller’s market.” 

Back to 2023, even though demand was weirdly high, a few things are putting the brakes on sales: low inventory means bidding wars and higher property prices, while rising mortgage rates are sidelining some buyers. 

LAW OF SUPPLY AND DEMAND

In the world of real estate, demand refers to the amount of property that people are actively looking to buy. This includes not just their desire for a house or condo, but also their ability to afford it. So, it’s about how much buyers are realistically willing to take off the market at a given time. 

While consumer needs encompass a broad range and vast number of people, real estate demand only reflects a portion of that picture. Many needs go unmet due to financial limitations, leaving some groups entirely out of the market. Others may not have a pressing need but still enter the market driven by speculation and potential profit. This creates a disconnect between the full spectrum of needs and the actual buying power reflected in real estate demand. 

Simply put, real estate demand hinges on three key things: what people want (regular demand), whether they can afford it (payment ability), and what’s happening in the market (operating conditions). Only when all three factors come together does real estate demand truly appear: 

• Regular demand: many consumers develop a strong desire for a specific type of real estate, but their resources may not allow them to fulfill that desire. 
• Payment ability: financial resources are key to turning consumer demand into real market demand. Without the ability to pay, a desire for a specific property remains just a wish 
• Operating conditions: active market conditions are crucial for demand to translate into actual buying and selling. The market provides the platform for buyers with financial resources to connect with available properties. 

The real estate market is a fascinating ecosystem with many players involved. But when it comes to how much people buy and sell, three key factors have the biggest influence: population growth, household income, and consumer prices. 

Population growth is a major factor that increases the demand for real estate. As the population rises, so does the need for housing and other social needs. This is especially true when population growth is rapid, which can cause some changes in what kind of properties people are looking for. However, the overall demand for housing isn’t just based on population. It’s also influenced by family size, income levels, and of course, housing prices.

 

Even with families getting bigger, if the family structure stays the same, the need for more space might increase slowly. This means the impact of family size on housing demand (elasticity) would gradually decrease. Especially when families have low income, barely enough for necessities for example, there’s not much wiggle room for spending more on housing (low elasticity). But as income rises above that point, a bigger portion can be dedicated to housing, leading to a much larger impact on demand (high elasticity). 

Talking about household income: when people are struggling financially, having a roof over their head is the main concern. So, their need for basic housing doesn’t change much even if their income fluctuates a bit. Economists call this “inelastic.” But once basic needs are met, rising income fuels a desire for a more comfortable living space – high–end housing. It can be said that the total demand we see in the market is the difference between what everyone needs for basic housing and all the houses that are already available.   

Consumer surplus is another big thing in real estate demand. It – or we translate to the difference between what someone is willing to pay for a good and the actual price they pay – changes very quickly when the scale of housing consumption is still low when the scale of consumption exceeds the necessary limit.

Each house or apartment has its physical features, like size and amenities, and its value. These two things are connected. For example, adding more living space through a renovation would generally increase the value of a house. However, the market price also plays a big role. The same property can be worth much more during a boom period and much less during a slowdown phase.  

Lots of people are still looking to buy houses, but there just aren’t enough homes match their needs on the market. This mismatch is creating some headaches for buyers. With fewer houses to choose from, it becomes a seller’s market, meaning buyers are facing tough competition. This lack of available homes is also pushing prices up – people are willing to pay more just to get their foot in the door. 

Here in Texas, as Cornelia Ward stated, there are a few reasons why the inventory is low. Finding land to build on can be tricky, getting the necessary permits can take a while, and construction itself might be facing delays. All these things slow down the process of building new houses, making the gap between what people want and what’s available even bigger. 

We can easily see that there has been an imbalance status when supply outpaces demand in rental market across US during the first quarter of 2024. This shift is primarily attributed to the recent surge in multi-family housing completions, leading to an increase in available rental units. While the influx of new rentals is gradually exceeding renter demand, leading to a slight dip in average asking prices, it’s important to note that vacancy rates are still relatively low. It suggests the market isn’t flooded with empty apartments, but there’s a welcome shift towards a more balanced playing field. 

The housing market right now is a tough nut to crack for young adults, especially Millennials and Gen Z. Even though home prices and mortgage rates have dipped a little, buying a house still feels out of reach for many. The big hurdle? Coming up with a huge down payment. This keeps a lot of young renters stuck in the rental market for longer than they might like.

2024 – BUYER OR SELLER’S MARKET?

With all those rules and factors, we discussed, the big question remains: will 2024 be a buyer or seller’s market, and how can we – as a buyer, seller or investor – avoid the housing traps to earn the best gains? 

Bankrate stepped up and stated their insights. They believed finding a house you love right now can feel like winning the lottery because there just aren’t enough homes on the market to go around. With more buyers than houses available, each property becomes a hot commodity. Unless a basket of new houses suddenly pops up, it looks like sellers will be calling the shots for the rest of the year. And supply will stay below what we have expected a balanced market would look like.  

Plus, home prices will stay on fire this year and not likely to drop down anytime soon. Bankrate said “As more time passes, more homeowners may be ‘forced’ to sell due to life events, so inventory may rise from the current anemic levels, but it’s unlikely to increase much. That means that prices are unlikely to fall on a year-over-year basis, unless demand falters.”

But buyers should not be overwhelmed by the situation. Greg Mcbride, Bankrate chief financial analyst clarified that “the plague of low inventory won’t be cured in the short-term, but a retreat in mortgage rates could prompt a few more sellers to put their homes on the market” and “there will be better balance this year than last.” Be very well prepared if you want to step in the current fragile market, and don’t be afraid to walk away if a house seems overpriced as there might be a better fit out there. 

Disclaimer: The blog articles are intended for educational and informational purposes only. Nothing in the content is designed to be legal or financial advice

Reece Almond