February 24th, 2016 2:07 PM by Gregg Mower
Ok I know most of you shy away from the term “Economics” as it sounds like a college class you hated to attended. The reality is the more you know the better off you are. Real Estate is a volatile commodity meaning it can move up and down in value rapidly, so if you can predict the up cycles and the down cycles you can learn to profit from investing in both cycles. Real Estate as an industry has been the strongest investment above all other investments over the last 200 years since we have been taking record of it. If you look at the mix of investments of the richest people in the world you will see the largest source of their wealth is their Real Estate holdings. But acquiring Real Estate can be difficult especially in this new regulatory environment so owning it makes it that much more important, whether it is your personal home, a commercial building or raw land it all is going to increase in value over time. The reason Real Estate will continue to increase in value over time is the simplest of all economic terms, supply and demand, there is simply a limited supply of land and there is always a demand to own it. As the demand for land increases with increases in population over time the price of land will increase, simply because people will pay more to own it when it is in limited supply. The best example of this New York particularly Manhattan as it is an Island and there is only limited space on it to build and what you see is high-rise buildings with extremely high Real Estate Values as there is a limited supply with a high demand for it thus high prices.
Supply and demand theory is the most basic of all economic terms, whether it is pertaining to Real Estate or any other kind of product or service. It is really simple in that the higher the demand for a good or service and the more limited supply of that good or service the higher the price will be. When the demand for the product or service and the supply is being provided at the same rate the demand for the good or service is that is said to be in equilibrium thus you would have stable prices. The interesting thing about Real Estate is the fact the you can’t make more of it, there is naturally a limited supply. This is especially evident in high density populated areas. Areas like New York, San Francisco, Los Angeles, and generally any urban area where you have good jobs and high demand for housing. In Real Estate you also have the desirability factor, areas within those high density areas that people want to live in such as Beverly Hills in Los Angeles, Santa Clara by San Francisco, and Manhattan in New York. Those are just some of the most publicized areas in the US, but within every High Density City there are particular areas that surround it that are more desirable than other areas within the area and those areas will demand a higher price simply because of the demand to live there. Location, Location, Location is what us in the industry refer to as the 3 most important aspects of Real Estate investing as the better the location the more apt the value will increase at a faster rate than the normal increases seen by the national averages.
To take the economics of Real Estate even deeper we need to look at where the good paying jobs are located or are going to be located. This is important for no other reason than affordability of homes around locations where there are good paying jobs. Without employment people can’t afford to buy homes, commercial property, or land. Yes, this is probably the best kept secret from potential Real Estate Investors as not all Real Estate investments are good ones. You see, you could buy cheap land out in the middle of the dessert or in swamp land, but is that a good Real Estate Investment, probably not, for no other reason than there is generally no demand for this land as there are no jobs located close to that cheap land for others to want to live there thus low demand and low prices. Real Estate speculators will generally look to invest in areas where large companies are planning to move or expand. A good example is the new Tesla factory being built outside of Reno Nevada near Sparks Nevada. This land has been basically desert land with no real value, but now with a new factory that will employ hundreds and thousands of workers the land surrounding that factory is rising in value in anticipation that workers will need housing and services close by the factory. Right now with the factory under construction you have seen an increase in employment, thus creating demand for housing so you have seen increases in Real Estate values as a direct result of the construction workers.
The availability of credit is an economic factor in Real Estate that is not talked about much, but you can see as it becomes tougher for the average American to borrow money to purchase housing that housing price increases slowdown in general. This is a simple principle of supply of available money which means the more money available to potential Homebuyers the more they can buy and less money available the less they can buy. Why is this important? As the Government imposes more lending restrictions the tighter the supply of available money becomes allowing for less people to enter the housing markets. Again, the less supply of good Homebuyers the less the demand becomes for housing then prices have to go down to stimulate demand. When Government intervenes into a free market by creating limitations what you get, in the case of the Real Estate Market, is less people being able to obtain credit thus less people being able to obtain housing. For example, if you tend to believe and vote for those that want to regulate lenders and how credit is delivered you will be voting for slower increases in Real Estate particularly in the single family home arena thus trickling down to all aspect of Real Estate. The Dodd Frank Act of 2008 was the Government and your elected officials creating a new Agency, the Consumer Finance Protection Bureau (CFPB) designed to protect the consumer from bad lenders and regulate how consumer loans are delivered to consumers. Since the creation of the new multi-billion-dollar agency it has created licensing for loan officers, restrictions on underwriting guidelines, and have made lenders culpable in every loan they fund making lenders less apt to approve challenging loans. Before this Agency was created and the regulations it has imposed on the industry, if Lenders made bad decisions they would lose money or go out of business or both, but since the Agency not only can that still happen but if they make a decision that the government doesn’t like they face stringent fines and penalties. So as a result of the legislation lenders are lending to far less people than in the past, thus creating a credit drag on the availability of money to borrow to purchase homes and slowing the economy in general.
Housing creation tends to bring about other increases in Real Estate demand such as commercial and industrial Real Estate. You see, the more people that live in specific areas the more the demand is for commercial goods and services such as shopping malls, Grocery stores, and other consumer services like Plumbers, Electricians, Contractors, Appliance repair shops etc.. Demand for housing itself is important but the net effect on the surrounding Real Estate for those support services is equally important as commercial development brings up Real Estate values across the board as well. As you can see the cycle of Real Estate itself will bring about jobs that will bring about demand for housing, so if you have a healthy Real Estate market you probably have a healthy economy in general. The more you regulate this industry the less opportunity there is for growth and the less opportunity there is for a healthy economy.
We as Americans need to be more educated not just in Real Estate but in all things so we can continue to be the best country in the world. If we allow our elected officials to govern the Real Estate markets or the Free market system that our country was founded on, then we will end up being a stagnant country with little or no growth or the ability to achieve a better for future for the generation of Americans. We have to be smart and not rely on the government to police the markets, it should be up every American to choose what good or service is best for them and if they have been wronged by a provider of a good or service there are avenues to communicate this, and if the provider of that good or service, no matter what their size is, does not fix the issue they end up going out of business and not bailed out by the Government. We have put way too much authority in our Government to police the so called free markets. In doing so we have created a monster of a Government that will keep needing to be fed, and that will eventually fall back on every American in the form of increased taxes and decreased freedoms and liberties. To fix this problem will only come through education, so whether your education comes from the internet or formal schooling never stop learning and never close your mind to opposing viewpoints and never trust the government is doing the right thing for you. Even if you work for the Government you can keep educating yourself and your family and maybe someday you will be able to branch out and enjoy the freedom to work for yourself and build something that will be lasting for you and your family and the American people. And lastly a final thought; America was built on freedom and capitalism, that is what made America great and the envy of the world, so do not give up on those basic principles of the American way.