Real Estate Tips

The Real Estate Market (Part 1)

In one sense, the real estate market is the sum of all the transactions of buying, selling and renting real property. A broader connotation would include all the factors and forces of demand and supply which influence market price and which affect the rate or intensity of market activity.
Thus, the real estate market is not a particular place, nor would it be feasible to draw a geographical line around all of the market influences which come to focus on the market transactions. True, we recognize the local nature of real estate markets and we refer to them by the name of the locality in which the property is found and within which the most powerful of the many market factors are know to originate. But market factors may be regional or national; the price of a small house in a village may be largely the product of local factors, but the price of an office in Chicago is set in a market where national factors play an important role.
Perhaps, you would wonder, why is an understanding of the real estate market essential to sound real estate investment decisions?
In the first place, an investor needs to know how the market currently evaluates properties of the type which he plans to buy or to sell. Thus he proceeds to analyze recent transactions involving similar properties; and in order to evaluate these sales, he must understand the nature and significance of the current market situation which conditions the transaction.
In the second place, a sound investment decisions, requires two kinds of forecasts based on predictions of real estate market conditions:

1- In forecasting the productivity of a given property, say an apartment building or a retail store building, the analyst must predict the future pattern of the level of rents. Changes in the balance of demand and supply will affect rent levels as will certain institutional factors. An understanding of market reactions to various kinds of forces is therefore essential to predicting future rental returns.

2- The forecasting of trends in transactions prices is a necessary part of real estate investment analysis. Every buyer will prefer to buy at the lowest possible price; if he anticipates a drop in the market price of the kind of property he plans to purchase he will postpone his offer; if he believes prices will soon rise he will act promptly.

The seller of real estate follows much the same lines of action though in reverse; his eagerness to sell and his asking price will be influenced by his forecast of market trends. Investors with a view to capital gain act only when they are able to foresee a rise in market price. No useful forecast of trends can be made by an investor without understanding the mechanism of the market and the nature of internal market interactions.