4 Key Factors That Drive the Real Estate Market

Major shifts in the demographics of a nation can have a large impact on real estate trends for several decades. These statistics are an often overlooked but significant factor that can affect how real estate is priced and the types of properties in demand.

For example, the baby boomers born from 1945 through 1964 represent a demographic trend that could significantly influence the real estate market. The retirement of the baby boomers, which began in 2010, is bound to be felt by the market for years to come.

There are numerous ways this type of demographic shift can influence the real estate market. For an investor, some key questions might be:

1. What would happen to the demand for second homes in popular vacation areas as more people start to retire?
2. How would smaller incomes and family sizes (as children move out) affect the demand for larger homes?

The answers to these and other questions can help investors narrow down the type and location of potentially desirable real estate investments before demographic trends start.

2. Interest Rates 

Interest rates also have a major impact on the real estate market. If you’re considering buying a home with a mortgage, use a mortgage calculator to see how different rates of interest can affect purchase prices.

Changes in interest rates can greatly influence a person’s ability to purchase a residential property. That’s because the lower the interest rate, the lower the cost of a mortgage. That’s great for borrowers, but it can also create greater demand for real estate, which then pushes prices up. As interest rates rise, the cost of a mortgage increases, thus lowering demand and real estate prices.2

However, when looking at the impact of interest rates on an investment such as a real estate investment trust (REIT), the relationship of rate to price can be seen as similar to a bond’s relationship with interest rates.

When interest rates decline, the price of a bond goes up because its coupon rate becomes more desirable. When interest rates increase, the price of bonds decreases.

Similarly, when interest rates decrease, REITs’ high yields become more attractive and their prices go up. When interest rates increase, the yield on a REIT becomes less attractive and that pushes its price down.3