When choosing a market to invest in, people often decide to go with securities such as stocks, bonds, options, and similar. Obviously, there is nothing wrong with this as it can lead to enormous returns backed by years of exciting ventures. Those seeking more hands-on opportunities, however, tend to go in another direction. Usually, that route leads them to industries like real estate.
The real estate market is based on property transactions that require a bit more capital and a lot more research than most other alternatives to passive income. Unlike the aforementioned securities, however, the real estate market is not as volatile. For example, stocks and bonds could plummet in value as a byproduct of every new law, bad corporate move, or political adversity. With real estate transactions, on the other hand, the main opponent tends to be the overall state of the economy. In other words, William S. White Winnetka would support the idea that the way that the economy is performing is directly related to how successful one’s portfolio is.
The first way in which economic fluctuations affect real estate boils down to the unpredictability that surrounds the sector. For those unfamiliar, this simply means that future investments will be much harder to forecast. In translation, the risk will rise and there may be far fewer entrants to the market. The relationship here is direct, which means that a high rate of fluctuations will lead to high unpredictability. The same is true for the opposite. So, real estate investors will often be much more active in the era of a healthy economy that is not going through a rollercoaster of changes.
Affects the Popularity
In connection with the previous, economic fluctuations will often lead to a spike or drop in the popularity surrounding real estate. This happens mostly because of the fact that the economy will cause property prices to rise or fall more unexpectedly. Thus, inexperienced buyers will be much more skeptical and unlikely to get involved. Consequently, the overall popularity will usually plummet when the economy is not doing well because the prices will rise uncontrollably, and new buyers will enter at a slower pace.
Increases/Decreases Financial Returns
Usually, people will recognize the connection between economic fluctuations and the real estate market first, and rightly so. After all, there is an endless amount of scientific data proving the fact that higher fluctuations in the economy will cause the same amount of financial changes in all investment sectors. So, if someone is actively pursuing property transactions, working inside of a firm market will make it much easier to predict returns. Due to this, they will have a better idea of how much money they should spend on purchases.
Well, according to the co-founder of the Montessori Academy of Chicago, William S. White Winnetka, a similar concept applies to situations of economic downturns. Namely, working in a struggling market will make it borderline impossible to accurately forecast future prices. Thus, the buyers will have a lot of difficulties gauging decent purchase prices and their profitability might be diminished.
Besides the aforementioned, the economy will also have a direct impact on the growth of the real estate industry within a specific time frame. To better understand why, William S. White Winnetka advises one to look at the recession that took place from December of 2007 until June of 2009. During this time, one can witness that the inflation rate that determines property value spikes actually went down below zero at one point. Expectedly, the entire sector was a lot more difficult to navigate and led to rapidly declining margins. Expectedly, any growth of the overall industry that might have been achieved was completely erased at this point. This includes research and development projects revolving the technology used here, media coverage of the sector, popularity among investors, and much more.
Forces Barriers to Entry
Finally, the real estate market will sometimes seem unreachable for a lot of prospective buyers. This is a direct consequence of the prices in the current period as they can be outside of the vast majority of buyers’ acceptable ranges. For instance, if the economy just crashed, people’s access to capital may become practically non-existent. So, while the prices of properties would hypothetically decrease, a lot of the investors who would normally be active end up lacking the necessary resources to buy anything.
This could be interpreted as a barrier to entry facilitated by the lack of positive cash flow. And as mentioned, the problem would be a direct consequence of the aforementioned fluctuation in the economy that reduced an average person’s ability to spend large amounts of cash.