The Rules of the Real Estate Market
Whether you’re in a major metro market or a small town; regardless of which part of the country, the economy, or even the day and age you’re doing business, three core rules apply to real estate:
Real Estate Rule Number 1.
Real estate is governed by the law of supply and demand. This rule is absolute and without exception. The appreciation of a market, the expectations of Buyers and Sellers, and the velocity of market sales are all dictated by the supply of- and the demand for- real estate properties currently for sale.
As a recent example, we saw rapid appreciation and a frenzied response by buyers in the U.S. real estate market in the years 2002 through 2005. This response was caused by the fact that demand for real estate was at an all-time high while the supply was limited. This caused rapid appreciation, with home Sellers receiving multiple offers within days or even hours. At one time during that period, homes in southern California were selling, on average, at 18% above the listed price – the result of a market condition where demand outstripped supply.
Real Estate Rule Number 2.
Real estate is governed by the law of cause and effect. In other words, positive situations cause positive outcomes, and negative situations produce negative outcomes. For example, a vibrant economic growth leads to a vibrant real estate market and strong appreciation of homes, while loss of jobs and a languishing economy produce exactly the opposite effect.
As a specific example, as the post World War II, baby boom generation matured, it fueled an explosion in second home purchases so strong that more than 21% of 2004 U.S. home sales were second home purchases – most acquired by aging baby boomers. This created desire for additional housing that affected the construction of new homes and home values in second home markets nationwide.
Real Estate Rule Number 3.
History will repeat itself. In any marketplace, there are cycles. Periods of rapid real estate appreciation are followed by stagnant periods where values stabilize or even decrease. For example, in the years of 2002 – 2005, in a number of key U.S. market areas more than 40% of new home loans were being written as low money down, interest only mortgages. These limited equity position purchases were being made on the assumption – the gamble – that the rapid appreciation cycle would continue and that housing prices would climb even higher. When the growth trend stopped, as it has many times before, home values declined, mortgage balances exceeded resale prices, and a large group of home buyers are forced to walk away from their homes as banks foreclose on a significant number of loans. This will further lower values and stagnate growth, as it has many times before.
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