We all know markets go up and down, but what really helps create value in real estate? Let’s look at the multi-layered cake concept to taste the answer. I’m not sure who came up with this analogy, but it’s definitely something I use regularly. Value in a real estate market is like a multi-layered cake since there are many “layers” in the market that help impact or create value. It’s easy to think of real estate in terms of being only about the relationship between supply and demand, but it’s also about interest rates, the economy, cash investors, foreclosures, financing, affordability, loan programs, lending guidelines, industry regulations, jobs, consumer confidence and so many other “layers” that end up playing a part in influencing the market.
Shifting Layers: When any of these layers begin to shift, it can create ripples throughout the market. This was seen clearly when the Federal Tax Credit came on the scene a few years ago. This credit created incentive for buyers to purchase properties, and it led to a brief uptick in values (until the credit expired). Another example would be a reduction in interest rates, which increases affordability and often leads to an increase in prices since more buyers jump into the market to compete for housing supply. Or consider a very recent example of FHA announcing it will now accept buyers who are only one year out from a foreclosure. This added “layer” in the market will help create value in the Sacramento area as a whole new pool of buyers hits the market to help absorb some of the increase of inventory as of late. Consider too that more FHA purchases will also simultaneously help pick up some of the slack from having less investors in the market. Can you see how some of these “layers” can end up driving real estate values one way or the other?
By the way, thank you to Realtor Joy Yip for letting me use a photo of her rainbow cake. I saw her cake on Facebook and knew it would be perfect for a blog post.
Question: Any stories, thoughts or questions? Feel free to comment below.