Greetings investors and real estate enthusiast, today we want to address something that is critical to your understanding of the real estate market, property values, and how you see your opportunities in various geographic markets moving forward.
It doesn’t matter if you are learning how to invest in real estate, how to buy foreclosure property, or you are a season investor, the insight we discuss today is something that you have to keep close to you moving forward in your career.
As a former Certified Real Estate Appraiser working in the market for over 7 years, I think I can speak with some authority on what drives value and how the economy and job market plays a very important roll in this process.
So, without further build up, let’s get down to business and have this discussion.
Real Estate Values Are Driven by Demand
Real estate, like everything else in this world, only has value or worth as long as someone is willing to give you their hard earned cash or assets in exchange for it. This is a basic economic principal of value that is at the center of the real estate valuation question and future. You may think that your property is work $200,000, but the market or people willing to give you their hard earn cash or assets in exchange for your property are only willing to depart with $100,000, then guess what? You can wait for days, months, or years until someone gives you that $200,000 offer or more; or you can take what the market has to offer and in this example this was $100,000.
In the example, if you walked way thinking that they were just trying to low ball you, ask yourself this. If you really walk away for the money that was offered, then what do you have? Nothing but the thought that your property is worth $200,000, but when tested in the market the people were only willing to part with half of what you have. This is how every value driven market works. You might have an idea, hope, or demand for how much your home or properties are worth, but at the end of the day you will only get what someone is willing to pay.
In this case, the demand isn’t their to support $200,000 because they may have 10 other opportunities to buy very similar houses at $100,000, so why would they give you your $200,000? Exactly, they wouldn’t, therefore, demand will not support your theory of the property value.
The Job Market Effects Demand
There are a laundry list of things that effect demand, but one of those things are the job market. How the job market effects demand is very easy to see and understand. If your property’s environment and potential buyers are all working good jobs, making really good money, then they have they could have the finances, credit, and ability to purchase a home.
Obviously, everyone of the people in that market is not going to be interested in purchasing a home at that particular moment, but there is a certain percentage that is going to be interest in the property market and looking to get one. A slightly smaller percentage will have the credit to get the loan approved. And a slightly smaller percentage will have the cash on hand to handle the down payment that they will surely need to put up when the purchase is going to be made.
After we have gotten down to these numbers, this represents the potential property purchase of people that are able to make a purchase if this is what they want. The more people in this pool that are interested in buying property in your area and your type of property the better. In addition, the fewer amount of properties that are available on the market like yours increases the interest in your property, considering yours is desirable, this is the demand for the property.
Therefore, since property values are ruled by demand, demand is effected by the number of people that are employed earning a decent wage, it goes to reason that the job market has a significant effect on property value. So if we are ever going to get out of this slump, then we have to do something about the job market. The crazy thing is that most people don’t understand this correlation and really just expect values to rise because “real estate values always rise.” No they don’t and the quicker you drop this line of thinking the better it will be for you.
At the end of the day, hopefully the country, government, and entrepreneurs realize that we are all in this together and we have to pull each other up by our bootstraps if we hope to see some actual change and progress.
