Why Embracing Change Is Important in Real Estate
May 2, 2020
A predictable future of our investments would be an ideal situation, but the market and economy will rise and fall.Investors can only be successful when they embrace this simple fact because only then can you prepare to respond to the change, instead of falling victim to it.
The real estate market is fortunate compared to other industries as it is not the first victim in an economic downturn. Even though we can’t predict all the changes, we can be sure there will always be fluctuations between a buyer’s market and a seller’s market. They will always follow each other, as this is the way the market re-balances itself when properties have been oversold or overbought.
Embracing change in the market is the only way to respond to corrections and be postured to benefit from them. In real estate, if you can embrace and prepare for changes, you can make a profit.
Change is Inevitable
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Real estate has significantly changed over the years with changes in technology, expansion in various franchises, and the emergence of the internet. Still, in many cases, real estate has been an industry that is slow to adapt to change.
In the 80s and 90s, there was a big push from franchisees, which caused massive growth in the marketplace, and the real estate agents were a key part of it. There was no other source of information back then.
In the 90s, this changed as there was a shift in suppliers who also grew massively. The real estate sector had overpassed the capability of real estate agents or newspapers, and the industry was in dire need of a coordinated approach. The next decade went to the most prominent change in the industry with the establishment of online real estate platforms and fragmentation in the industry.
Previously, real estate agents would conduct business by physically approaching the clients, discussing innovation, and other challenges. But these meetings were suddenly replaced as information was readily available online. The face of the real estate industry has massively changed since, and only one thing is sure – change is inevitable.
Anticipating Change
The commercial ecosystem thrives on a principle of symbiosis where various businesses, including suppliers, stakeholders, and real estate agents, all depend on each other for information and various other things.
When they work together, they can ensure the joint survival of the industry, because the players are interconnected, and they contribute to the improvement of this environment.
With the shift in the industry, this ecosystem has grown to include data and various suppliers of technology, different government regulatory bodies, and suppliers, who create a complex coalition of stakeholders.
Anticipating change in the industry with such a complex ecosystem benefits everyone in several ways.
The real estate industry gets a much better position that can predict and even skew the outcome of events, instead of simply being reactive to the changes that are happening around them. Instead of being reactive, they can choose to be proactive and create a strong voice and a united front in case of changes in regulations, or anything else.
It can improve the standards of agents who can enhance their skills through education and training to keep up with the changing times and shifting demands of the consumers.
Technology is the biggest flux in the real estate ecosystem, and working with technology partners ensures that the industry is in a better position to predict and handle change.
The Reason Behind the Change - Bigger Houses
Baby boomers created an unprecedented rise in demand when they bought their first houses. They are now entering the market for their second or third homes, while their children now make up a quarter of home buyers. By far the largest group of buyers is millennials, accounting for 38% of buyers.
According to a report, baby boomers own nearly $13.5 trillion in homes, and around 41% of them are homeowners. However, they show no interest in selling them in the near future. It is expected that millennials and Gen Z will drive the housing demand, but much of that demand will be in the form of rentals since those under 40 are more likely to rent than buy.
In major cities and states, there is always a high demand for properties and a major lack of supply because the prices of these houses tend to rise dramatically. When the economy is weak, and there is an over-supply of properties, the prices of houses would definitely fall.
However, the complicated facet of the real estate market is that measuring supply and demand at any given time is quite difficult. First, it is dependent on how long it takes for construction projects to get completed, which can be influenced by many outside factors. In the same way, real estate is also a process that takes a very long time to complete. Buying and selling property is never instantaneous.
A major factor that contributes to the demand for houses is when interest rates get lower. Falling interest rates lead to more willingness to take on debt and buy homes. Repayment amounts are not as high, and buyers are more likely to purchase bigger and more expensive houses. Then these buyers enter the market, which increases the demand for housing, inventory decreases – which fuels the competition to buy the homes. Because development is a slow process, prices will rise.
All the while, the supply of housing keeps reacting. When people are moving from one house to a bigger one, inventory can increase. Developers add new construction, adding to the number of available houses. People take cheap money to buy bigger houses where they can accommodate a family and expand.
Since there is very low tolerance in the market for higher interest rates, cheap money will continue to drive development and higher prices for existing inventory.
Appreciating The Value Of The Land
The land itself is a major factor in influencing the price of the property. Here are the three major factors that explain how the value of land is perceived.
Location
Let’s assume a scenario when there is economic inflation, and the prices of items, goods, labor, and construction material are rising. In events like these, the price of the land should rise as well. But this is not the case.
For starters, the value of the land depends on its location. If the property in question has bad accessibility, insufficient infrastructure or socio-economic stature, or there are already too many residential projects in the area – the price of the property will likely not rise due to the lack of demand.
Property market drivers
In real estate, there are very specific factors that influence the value of the land. The market drivers are all the constructions happening in any area, which impacts the price and attractiveness of the land positively.
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This could be the building of new workplaces in an area, the building of malls or markets, being close to educational places and hospitals, etc. If there are many zoning regulations, like what happens in townships, the development of properties in open and protected spaces might be prohibited, which is a positive market driver when it comes to pricing a property.
The availability of transportation facilities by public transports such as buses, trains, air, etc. is also highly desirable factors.
If any construction aims to improve the quality of life of the homeowners in a specific area, it can also push property prices up in a major way. Think of having flyovers to cut down the traffic in an area, or building water dams in an area that has water deficiency.
Rising population
Population growth contributes to rising property prices in an obvious way by creating a high appreciation of property prices in certain locations. The prominent case studies of various cities like New York, and California show that the massive increase due to various socio-political issues have caused people to immigrate at these places at a much higher rate.
The property prices have kept up with the rising demand in these places because they have become technical, cultural centers with high job opportunities and touristic value.
Conclusion
Real estate is an asset that is the combination of the physical property and the land. Like any other industry, there is a set supply and demand in real estate too. Home prices, bonds, and stocks, all depend greatly on the same principle, but how exactly does the housing market tie in here?
Demand for bigger houses is at an all-time high. Yet supply is low, which has only caused the prices of homes to rise to an unexpected level. If there was a glut of housing available, then the owners would be lowering their prices, which means even with the rapid rate of construction in the industry, the real estate market is still seeing unprecedented demand.
Simply, due to the inflated demand, the price of housing has been constantly rising. Capitalizing on this is only possible when real estate completely celebrates and embraces change. Real estate is an industry where demand is a certainty and the only issue remains is predicting the trend of the demand. Therefore, tracking, accepting and moving with changes is the only real solution.