Five Trends Transforming the Real Estate Economy

Joseph Maharaj

August 23, 2022

What are the underlying forces that are transforming the real estate industry? Five converging trends are disrupting the fundamentals of the industry:

  • Demographic change
  • The future of work
  • Rising mortgage rates
  • Institutional investor purchases homes

The real estate industry has only reacted marginally to these trends, risking another housing bubble and deteriorating American social and political cohesion. This article outlines the key drivers of the industry’s transformation.

Demand for communities that are more prosperous, resilient, and equitable

There is a growing demand for more prosperous, resilient, sustainable, and equitable communities. Creating a more resilient community means putting the right resources in place and addressing issues at the community level. It also means addressing issues of poverty, including the displacement of poor people. Local leaders must better equip their communities to handle economic, social, and environmental challenges. There are many strategies for this, including building resilient infrastructure and reducing unemployment.

Institutional investor purchases homes

According to new NAR data, large institutional investor purchases of homes are transforming the real estate economy for the better. Investors generally lower-income than owner-occupants are now competing for existing homes, often converting them to rental properties. Because renters are often lower-income than mortgage-qualifying would-be homeowners, the increase in investor purchases could create more affordable housing for the lower-income population.

The growth of institutional investor purchases is changing the real estate market across the nation. Institutional investors are not your average mom-and-pop investors; they are large investors interested in buying properties on a massive scale for a profit. Texas leads the nation in institutional purchasing, with 28% of single-family homes purchased by these investors by 2021. This trend continues as institutional investors become increasingly more active in buying homes.

Supply chain bottlenecks

For developers, supply chain bottlenecks are a major issue. These problems have exacerbated a housing shortage and caused real estate prices. A recent survey showed that 86 percent of developers experienced delays due to material shortages or delays in obtaining entitlements or permits. While some may feel the messiness is inevitable, others believe the effects will eventually fade. The disruptions are creating frustration for the construction and real estate industries.

Many companies are trying to reduce supply chain costs by using local suppliers. This is called onshoring. In short, manufacturers move manufacturing operations to a neighboring country. For example, retailers are considering relocating production to nearby cities. The move will increase productivity, but it will increase costs. In the meantime, consumers will continue to demand shorter delivery times. To meet this demand, retailers must locate logistical hotspots near larger populations.

Rising mortgage rates

While rising mortgage rates may sound like a good thing for homeowners, they can also hinder buyers. Higher mortgage rates mean fewer people can buy a home, and prices will likely go down. This may cause sellers to lower the price of their homes to attract buyers. In some rural areas, rising mortgage rates may also hurt the economy. As a result, prices will go down, and the real estate market will suffer.

While economists predict that mortgage rates will remain low for the foreseeable future, this is not the case. Recent events, such as the Russia-Ukraine war, pandemic lockdowns in China, and labor shortages, have contributed to the increase. The Mortgage Bankers Association has predicted that mortgage rates will stay around current levels until at least 2022. This doesn’t mean that the real estate market will collapse, however.

Housing affordability crisis

As the housing market slowly rebounds from the Great Recession, many Americans struggle to afford their homes. At the same time, wages are stagnant, and housing costs keep rising. The easy solution would be to build more housing. However, that’s not always possible. In addition to the high cost of housing, communities are strained by a lack of adequate public transportation. But there are ways to increase the housing supply and lower costs.

The first thing you need to understand about the housing affordability crisis is that it’s a cyclical phenomenon. In the early 2000s, a housing bubble occurred due to risky lending practices and overbuilding. Today, home buyers have a better position, thanks to credit scores, conventional mortgages, and pandemic savings. However, the housing shortage has collided with historically low mortgage rates and growing demand from families and remote workers. As a result, home prices have skyrocketed almost everywhere.