Economic Indicators That Impact Real Estate Values and Demand

February 14th, 2024

The housing market can be complex to predict, with many economic factors influencing prices and buyer demand. At Empire 8 Property, we closely track key indicators like GDP growth, interest rates, inflation and more to forecast when regions may hit an upswing or downturn. This helps our clients make informed decisions on multi-family purchases and roofing investments. In this post, we’ll explore some top metrics we utilize and how national and local economic health tie into property value changes over time.

Key Macroeconomic Factors Influencing the Housing Market

Several broad economic measures can signal overall market shifts, usually with some lag before visible effects show for real estate. These include:

GDP Growth Rates

As the nation’s production expands and we create more aggregate output and incomes, this fuels major purchases across sectors. Real estate is no exception – strong gross domestic product (GDP) growth indicates more disposable income floating around to support home values. Per capita GDP also measures broader consumer capability to buy property.

Slowdowns or dips in growth conversely may mean household budgets tighten ahead, slowing demand and new construction. Tracking long-term GDP trends can thus help us forecast booming or receding markets. Historically prices have moderated when yearly expansion drops below 2%, especially coupled with rising joblessness.

Interest and Mortgage Rates

As key benchmark rates issued by central banks and commercial lenders rise or fall, this impacts affordability calculations for many prospective buyers. Mortgage rates available to consumers directly factor into monthly payments on a given property.

We saw incredible demand unlocked when average 30-year fixed rates held below 3% amid the 2020-2021 boom. As prevailing rates now climb past 6% as of early 2023, they have cooled some overheated regions quite rapidly. Ongoing Federal Reserve policy shifts will continue to pass through to housing costs. We pay close attention to forecast moves so clients can factor expected financing expenses into investment decisions.

Inflation and Consumer Prices

Related to interest costs and GDP growth, the inflation rate represents increasing consumer good expenses and erosion of purchasing power over time. Housing typically acts as an inflation hedge over long periods, with values rising steadily rather than rapidly. Land and buildings hold inherent value against currency depreciation.

Yet when inflation spikes too quickly as we’ve seen in 2022, this does hamper short-term pricing. Soaring CPI cuts into household budgets even with growing incomes, limiting buyers able to manage expanded mortgage payments. But once price acceleration calms, demand should recover in support of baseline property value. We’re keeping an eye on these consumer price changes so clients are informed if market headwinds slow things down.

Employment Levels

Beyond macro patterns related to output and inflation, the job market itself fuels or constrains real estate momentum significantly. When unemployment sits very low as seen in 2018-2019, this encourages major investments like home ownership because household incomes rise and more qualify for lending required.

High joblessness early in recessions obviously deters big-ticket purchases until stability returns. We monitor national and local claims numbers to gauge the stability of area labor forces. Employment drives resident earnings so tracking this gives us clues to projecting demand changes.

Consumer Sentiment and Retail Spending

Within the larger economic picture, consumer health matters because buyers ultimately propel housing transactions based on their financial situations and confidence to transact. Two metrics help reveal household dynamics below surface GDP to see how amenable families feel about major property decisions.

Sentiment Indices

Surveys like the University of Michigan consumer sentiment reports provide monthly snapshots of how households view their overall financial situations. When perceptions grow darker about current and especially future conditions, people tend to limit unnecessary buys.

Sustained pessimism translated into real estate would mean slower bidding and traffic for listings. So we incorporate mood measures into our analysis to anticipate if consumers pull back as part of market corrections. Fortunately sentiment often rebounds faster than economic fundamentals themselves.

Retail Sales

Another useful proxy for consumer behavior is tracking overall retail spending month to month excluding gas, autos and related volatile segments. Higher discretionary expenses reflect greater incomes free for major transaction like housing. Sales declines predict decreased broader demand ahead.

We can also break down records geographically to compare regions. Cities or states with outpacing retail growth versus national averages may drive disproportionate future real estate appetite as well. Historical sales mixes also give clues to changing community demographics over longer periods. We use all these data angles in our advising.

Additional Economic Indicators to Monitor

While headline GDP, jobs and sentiment numbers tend to move markets, several other releases offer extra context on real estate-specific conditions across economic cycles.

Housing Inventory Levels

Unlike some commodities, housing supply isn’t perfectly flexible to match demand spikes because construction and approvals take time. So the overall level of homes actively listed or entering markets shows whether supply is keeping pace. Months of inventory measures total stock versus recent sales velocities.

Too little inventory signals depleted options and intense bidding interest. Heavy supply points to softening appetite and forthcoming price adjustments to entice customers. We watch inventory patterns from the National Association of Realtors along with state and local MLS feeds to call where supply-demand balance sits. Recent years have seen chronically low listings, but a 2023 surge may indicate peak pricing is passing in many metro areas.

Building Permits Issued

In a similar vein based on the lag between approval and housing completions down the line, tracking building permits shows leading signals of future inventory relief even if today’s remain sparse. More permits issued points to construction activity in the pipeline to feed real estate supply months ahead. Permit declines or plateaus imply planning slowdowns that could extend tight availability if demand also keeps moving. Since Empire 8 Property handles multi-family and roofing needs for investors entering growing regions, monitoring these leading indicators helps project where opportunities may emerge.

Commodities Pricing

Lastly on the topic of inflation and costs, keeping an eye on key construction materials like lumber and copper pricing gives useful views into property development economics. When commodities skyrocket as they did in 2021’s buying surge, the expense can inhibit some new building because investor profitability decreases at higher baseline costs. Yet materials inflation also lifts rebuild values on existing homes. So we track goods indexes for insight balancing both angles when advising multi-family clients.

Real Estate Market Cycles

While staying updated on all the above metrics offers helpful barometers into housing, Empire 8 Property also relies heavily on historical context to set realistic expectations. Real estate in particular follows broader cyclical economic shifts, with some consistent patterns worth noting.

Typical Property Cycles

On average, most real estate markets move in cycles spanning around 7-10 years from peak to peak or trough to trough as demand, development levels and valuations overshoot then correct. Not all downturns are as severe as the Global Financial Crisis but mini corrections happen more frequently. Sellers hoping to time exclusives exactly at the top will usually have difficulty nailing the crest. So we counsel patience planning for longer investment horizons, not reacting to media manias overplaying each up and down.

Post-Recession Rebound Patterns

History does showcase that the steepest value gains often occur just coming out of recessions as employment, construction and lending restart but cannot match surging buyer interest right away. 2009-2012 saw tremendous appreciation after the financial system stabilized.

We’re now again observing faster inflation-adjusted gains in 2023 as the 2020-2021 surge which more dramatically overshot fundamentals recalibrates into more sustainable territory. Not all areas move in perfect sync, but the cycle itself remains reliable from a 30,000 foot view. Understanding where the current trajectory sits is crucial for Empire 8 Property customers plotting multi-year strategies rather than day trading homes. We incorporate a rules-based framework assessing baseline cycle progression rather than monthly headline whims into recommendations.

Regional Variations between National and Local Real Estate Trends

While housing follows national economic forces generally, not all metro areas move perfectly in line with the broad U.S. market averages at a given moment. Local conditions also come into play banked on the strength of industries driving regional incomes higher or lower. Climate changes and natural disasters additionally feed geographic nuances around physical supplies and appeal.

For example, certain Sun Belt and Mountain West cities have observed stronger migration inflows and valuations lately as remote work untethered households from historical job hubs. Coastal economies like Boston and Seattle boosted by biotech and cloud computing outsized national technology sector growth for years as well. We caution clients assuming their target footprint tracks or lags the same as national models. Understanding specific metro economic health and demographic directions provides much more accurate insight into what to expect from local real estate. Regional expertise makes a big difference identifying growth paths and capital inflows for multi-family in particular.

Tracking and Forecasting Real Estate Market Shifts

Given all the interconnected economic ties covered above impacting property, accurately monitoring indicators with proven directional relationships and magnitudes of market influence is crucial for investors like Empire 8 Property clients planning buys across different cycles. Applying perspective of historical context also helps set realistic short and longer-range performance expectations to inform strategies.

Follow Proven Market Indicators

With so many data series across GDP, jobs, construction, lending rates and more to weigh, following consistent statistically-valid leading indicators that explain significant portions of price movements is vital not to get overwhelmed or whipsawed by monthly noise in either direction.

For example, at Empire 8 Property, we’ve backtested a custom index tracking weighted changes in key inputs historically explaining over 80% of area property fluctuations. This helps set grounded baselines to judge each turn’s real magnitude amid breaking developments. Models enable estimating coming shifts and stress testing across projected scenarios – all to best equip multi-family buyers or real estate developers planning major roofing projects.

Lean on Historical Context

In tandem with statistical forecasts, long views of prior cycle paths in analogous periods also bring wisdom of experience. While no two regional downturns or booms behave identically every time, asset valuations behaving somewhat consistently through history provides perspective.

As one illustration, today’s inflation uptick combined with rising rates shows parallels to the late 1970s/early 1980s cycle. Comparing current events to the past Indicates resolving imbalances may require monetary policy staying reasonably tight for a period before returning to affordable expansion again. Markets endured that era’s volatility before recovering. So historical readings assist anticipating coming sequences based on prior resolutions.

Consult Local Market Experts as Well

Even with comprehensive data modeling and chart pattern recognition, on-the-ground insights from experienced real estate professionals in your target metro areas provide another invaluable vantage point synthesizing indicators with emerging trends. Certain demand shifts around preferences or demographics can appear locally before spreading nationally. Granular neighborhood developments also influence multi-family hot spots and acquisition priorities.

At Empire 8 Property, our team offers centuries of combined property industry expertise within regional Australian and global markets to help interpret economic signals and running changes as clients evaluate deals. Contact us today for a free consultation on the latest indicators in your city and how national projections may proceed. We stay on the pulse of macro forces and area terrain to deliver optimal context making major investment decisions.

Whether starting your search or looking to add units to an existing national portfolio, allow our team to position you for success timing metro cycle peaks and valleys so your multi-family buys capture full growth runway ahead. With bespoke data tools tracking target markets and grounded assessments of past cycles, we guide clients towardsprime opportunities as economic indicators shift. Reach out now to start the conversation around optimizing your next purchase or managed roofing retrofit.