Every investor wants to know how to predict real estate prices and the process is not as mysterious as it may appear.
While I focus on investing for cash flow, loan amortization, and tax benefits, I also appreciate the warm and fuzzy feeling you get as a investor when your real estate values climb! So, what are the things I look for when figuring out how to predict real estate prices?
Prices are a result of supply, demand, AND capacity to pay. Let’s look at these factors one at a time:
Demand for real estate is driven by population growth which is fueled by job growth. In resort and retirement communities, you might see high demand and price growth even when the local job market is stagnant because the money to fund real estate purchases in resort areas was earned somewhere else and imported.
Real estate supply is restricted by (1) availability of land, (2) geographic boundaries such as water and mountains, (3) political boundaries such as permit fees, restricted density policies, and (4) economic boundaries such as availability of development capital and the ability to build and sell new properties at a profit.
No matter how desirable or limited in supply something is, the price of the thing will be dictated by how many people can afford to buy it.
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