How The Political Climate Affects The Real Estate Market

How The Political Climate Affects The Real Estate Market

news image

By Nic DeAngelo, president of Saint Investment Group, a cutting-edge real estate fund platform. 

All of the uncertainty and volatility in the world has kept real estate investors on their toes for the past two years. In addition to a tumultuous 2020 election — where real estate-related policies like the Fair Housing Act and certain investor-friendly tax cuts came back under the microscope — the larger market has also struggled to recover from lockdowns and supply shortages.

As an investor, knowing what to look for and how to use the changing economic environment to your advantage can help you navigate this period. Here are three critical factors that are changing the direction of the real estate market today.

Rising Prices And The Economy

Inflation is on everyone’s mind these days. Everything from spiking gas prices to increased construction costs is putting a significant damper on consumer spending. And as we know, rising prices also impact home prices. If wages don’t increase as fast as inflation, would-be home buyers may end up renting longer.

Rising oil and gas prices, for example, cause a chain reaction that negatively influences consumer spending in every category. If fewer people travel, this means fewer are spending money on hotels or Airbnb reservations. And increased costs for construction materials culminate in longer lead times for property development. 

All these problems will continue to keep the U.S. in a housing shortage — an already painful national supply problem that has been continuing for years and shows no signs of improving fast enough.

Mortgage Rates

Without new homes to keep up with demand, theoretically, higher existing home prices are the inevitable result. But factors like higher mortgage rates can dampen a buyer’s market. Too few buyers looking for homes can quickly soften home prices. And as interest rates rise, demand decreases as it costs more for homebuyers to take on a mortgage. Home prices also decrease as interest rates rise and competition for buying becomes less cutthroat. 

It’s important to note that the government and the Federal Reserve do not directly set mortgage rates, but they certainly influence them. For example, during the 2008 financial crisis, the Fed bought up mortgage-backed securities and government debt in the form of Treasury bonds. This program (known as quantitative easing) consequently increased the country’s money supply and encouraged banks to lend without as many parameters. The result was lower mortgage rates across the board. 

On the other hand, when the Fed is called on to maintain economic stability in times of inflation, it will set policies to pull money from the supply, which means borrowers will likely pay a higher interest rate on mortgages. We’re still waiting to see how the Fed is going to influence our post-pandemic market, and only time can really tell what that will look like for real estate investors. 

Supply Chain Problems

With low mortgage rates and a tight housing supply, the real estate market has been booming for years. But continued supply chain challenges and an inflationary market may bring about problems that property developers and commercial real estate investors have never been confronted with before — at least not on this scale. 

Final Thoughts

When the conversation revolved around supply chain challenges amid the pandemic, experts tried to make predictions as to when things would finally go back to normal. Now, all investors can do is reduce risk and be as pragmatic as possible while remembering to pay attention to signals in the market that more change is coming.

Read More