Although the real estate market is traditionally cyclical, global trends, a changing economy and international affairs are making it harder to predict what will happen in the industry. As a result, buyers and sellers as well as real estate professionals must stay informed about trends that impact the industry and adapt to changes quickly. In the United States, the real estate industry has such a strong impact on the gross domestic product (GDP) that some experts believe significant market trends can affect the world’s economy. The Great Recession, for instance, nearly caused a global economic collapse. This extreme example aside, the strength or weakness of the economy typically charts the course for housing trends.
During healthy economic conditions, there are abundant jobs, and consumers earn ample income, resulting in strong housing sales. In a weak economy, home sales are typically the first of several major purchases that consumer put aside until conditions improve. When the economy fares poorly, families reduce spending and focus on acquiring necessities. It’s this consumer behavior that makes it vital that real estate professionals understand how the economy works as well as understand the variables that affect the strength of the economy. The following sections highlight 4 factors that affect the real estate market.
Factor 1: Generational Income Distribution
It’s more difficult for today’s consumers to purchase a home compared to past generations of buyers. Today, the top 1-percent of the population holds 40-percent of the world’s wealth. The housing market is tougher, taxes are higher and salaries are lower, resulting in less opportunities for buyers. This problem is further intensified by income inequality, which has increased in the last few years. Economists, consumer advocates and politicians have debated over how to remedy this situation. However, there is little consensus toward a viable solution.
Factor 2: The Women’s Equal Pay Movement
With the rise of #MeToo and other women’s movements, there is more controversy around creating equal pay for women. This is affecting how women spend their money as well as female real estate professionals. Commercial real estate recruitment and staffing firm RETS conducted the 2018 Women in CRE Survey, polling female real estate professionals of all levels from across the nation. As their salaries increase, surely, women will be more inclined to buy property and invest, but despite this, the survey revealed that the commercial real estate industry performs poorly in gender equality, even in the face of the entire industry adding $935 billion to the United States economy in 2017.
Factor 3: Unpredictable Taxes and New Rent Laws
Change is inevitable and unpredictable. Real estate tax laws are being taken more seriously now, and many questions are being raised around owner rights and rent control. Although real estate is still a great tax break, being a buyer and taking on the role of landlord is getting more challenging, especially for those who have had property and managed it for a while. Most changes favor property owners, such as lower income tax rates, few write-offs changes and new deductions for pass-through income. However, there are new laws that limit how much losses landlords can write-off to offset losses from other income sources, and new passive activity loss (PAL) rules that prevent landlords from writing off passive tax losses in excess of passive income.
Factor 4: The Financial System
In June 2017, United States housing sales dropped sharply as demand pushed prices up, sidelining many prospective first-time buyers. It’s hard to say whether the government, and those in office, directly affect the housing market. We do know that the housing market changes with the GDP and the overall performance of the economy. When the economy’s steady, people are more willing to risk buying and making larger purchases. However, when the economy suffers, buying tapers off, especially in the housing market.
Overall, houses are selling slightly faster, with the average time on the market dropping from 34- to 28-days compared to a year ago. Additionally, low unemployment is providing some economic access to housing. However, incomes are stagnating, while the cost of living is rising. With annual wage increases barely surpassing 2.5-percent, home purchases are a challenge for today’s buyers. As a result, closings by first-time home buyers are falling nearly 10-percent below what economists suggest is needed for a healthy economy.
Experts predict that housing demand will remain plentiful. However, it’s uncertain whether there’ll be enough homes for buyers. Additionally, the economy appears stable, for now, with some waxing and waning in various U.S. regions. It will be interesting to see how economic variables affect the future of the United States real estate market in the coming months.
