Forced sales and house prices essay
In order to analyze the predictability of real estate prices and the factors shaping these prices, it is necessary to determine the type of competition in real estate market. A “model” market is a perfectly competitive market – such a market which has the maximal level of competition. The characteristics of a perfectly competitive market include perfect knowledge, the absence of time lags or information failures, the absence of entry barriers, homogenous units of output, a large number of firms in the industry, the absence of externalities and the absence of the need for government regulation (Mettling & Cusic, 2014).
In terms of real estate market, the assumptions of a perfectly competitive market do not hold. In particular, the “output” of houses significantly differs basing on the presence or absence of people living there; houses significantly vary in characteristics, so products are not homogenous; the barriers to entry are high due to regulations and high building costs (Campbell, Giglio & Pathak, 2011). Therefore, the real estate market is rather characterized by monopolistic competition than by perfect competition (Mettling & Cusic, 2014).
The determinants of supply and demand of real estate properties are diverse. Supply is influenced by the costs of development and the costs of labor, returns on investment, availability of capital, community planning and availability of space, government regulations and policies (Mettling & Cusic, 2014). Real estate demand determinants differ basing on the categories of demand. It is possible to identify three key categories of demand: residential, commercial and agricultural (Mettling & Cusic, 2014).
In the context of this paper, real estate demand is largely viewed as residential demand. It is driven by such factors as quality of neighborhood, availability of infrastructure, access to services, dwelling amenities and their costs. In particular, perception of he neighborhood and the presence of foreclosures might notably impact real estate prices (Campbell, Giglio & Pathak, 2011). In general, real estate prices are associated with numerous moderately predictable factors, but the variety of these factors and the subjectivity of some factors reduces the accuracy of predictions.
If real estate demand exceeds real estate supply, there emerge conditions for a housing bubble. It takes place when consumers strongly expect housing prices to rise and invest heavily into real estate. The causes of such demand increases are economic revival, demographic boost, low interest rates, easy access to capital, lack of financial literacy among buyers, high-risk mortgage practices and speculative behaviors of real estate market participants (Campbell, Giglio & Pathak, 2011).
It is also important to consider factors determining the duration of the property’s stay on the market. The key factor is the relation between the average price of such real estate objects and the target object: the more the object is overpriced, the longer it will stay on the market. Other microeconomic factors influencing buyer and seller choices are competition (the supply of homes with similar characteristics in the target area), selling costs, selling conditions, urgency of buying and selling (Campbell, Giglio & Pathak, 2011). With regard to macroeconomic factors, the key factors are the availability of financing, relevant regulations and the dynamics of real estate market in the considered area. Therefore, it is possible to state that the direction of real estate price change is predictable, but since it depends on a variety of factors including several subjective and demographics-driven factors, the predictions might rather be presented as ranges of values than precise real estate prices.
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