Real Estate Supply and Demand. There are several indicators that can portend the health of the housing market. From this we can derive a sense of the health of the markets in general since housing is a large portion of our economy.
Residential Real Estate Supply and Demand
In the residential world, we are most concerned with the investor category for several reasons. The reason the investor category is so critical is that this segment of the real estate market is the gauge for residential real estate trends. Investors are very sensitive to end user demand and they buy and price homes accordingly. So real estate investors are a primary focus of this article.
Commercial Real Estate Supply and Demand
The second division is commercial. From a real estate supply and demand perspective, this segment is a two-year lagging indicator behind residential real estate as a rule of thumb. So goes the residential market, so goes business which is why commercial real estate has a lag. Well if we know the main indicator of commercial real estate is the residential market, then logic questions why we even follow the commercial market.
There are several key factors in this market that can help us understand more clearly, how deep a trend is but more importantly, the velocity of the trend. How is this possible? In the real estate supply and demand equation, residential real estate is a mass of money based strictly on demand. Commercial real estate is a mass of money based not only on demand, but on demand projected in the future.
Comprised of purchases and leases, commercial real estate is executed by a more 'intelligent' market member. Not that they are smarter, just that they do much more research into projected demand curves prior to executing a purchase or a lease. They are more careful not to extend into a cycle without reasonable assurance that they will be able to sustain both top and bottom of a cycle.
This brings us to our final point, the cycle. Historically ten years top to top (or bottom to bottom), a real estate cycle has a tendency to consistently repeat which helps us trend where we are headed both economically and historically. The challenge lately is that the swings have become more violent and pronounced with a greater dependency on external events on our economy.
This is one factor in globalization, but that is for a different discussion. Additionally, in this discussion we are not factoring employment or economic dynamics as drivers of demand. We are simply delineating residential real estate and commercial real estate to fundamentally understand the correlation between the two.
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