Home Prices
For this reason, investors need to have a very good understanding of how house prices are determined, what are the forces that drive their movements and under which circumstances they are more likely to register significant gains (see article below titled “What May Cause Home Price Increases?”. Such an understanding will help investors better evaluate the prospects of the local housing market in which they operate and better identify circumstances, locations and properties that are more likely to provide high investment returns. Given the importance of home prices for residential investors, including the millions of home-buyers, we have devoted a page of our website on this issue to provide a more thorough discussion, as well as relevant articles, a reading list, and sources of home price data and forecasts. The article below provides valuable insights regarding the factors that drive increases in housing demand and home prices. Forces that Trigger Increases in Demand for Housing In thinking about drivers of housing demand, we need to distinguish what factors cause increases in aggregate market demand and what factors cause increases in demand for a specific location or locational demand. Since a property is fixed at a given location, it is extremely important to understand from the outset these two mechanisms by which demand for a specific location may increase. Although I referred to these two mechanisms earlier, their repetition here is warranted given the importance of this issue in understanding the forces that can trigger increases in home prices: 1) Increases in aggregate market demand, due to economic and population growth, will contribute to increases in demand at many locations within a market. The strongest and most advantageous locations, as perceived by the types of households that represent the increase in demand, are likely to reap the highest benefits from such increases. This is where properties with market-driven value increase potential can be found, as long as these locations are not oversupplied. I refer to this locational demand increase as a market-driven increase. Figuring out which locations in a metropolitan market will experience increases in demand for housing, can help real estate investors evaluate and identify residential neighborhoods where home prices are more likely to rise (if supply conditions are also appropriate). Identifying locations with potential for increases in housing demand within an urban area, requires an understanding of how aggregate demand for specific types of real estate is distributed across competing locations. The most important principle regarding the distribution of demand for property in general, and housing in particular, at different locations within an urban area is the comparative advantage. This is a very important concept that real estate investors should always have in mind in their search for properties with significant profit potential. I suggested earlier using Sweeny’s framework of bi-hierarchical structure in classifying locations in terms of their comparative advantages. Residential investors looking for highly profitable opportunities in the housing market should be constantly monitoring developments and prospects in the urban fabric, evaluating and assessing how comparative advantages that are valued by households looking for a home are likely to change and how such changes are likely to affect home prices in the different residential zones. Changes in comparative locational advantages shift demand for real estate from one location to another, raising home prices and rents in the latter and depressing home prices and rents in the former. This is true not only as far as intra-urban demand shifts are concerned (shifts among locations within the same urban area), but also as inter-urban location demand shifts (demand shifts from one urban area to another). Tweet
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