Biggest Macro Forces Impacting Real Estate Investing

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In the world of investing, there are multiple forces that come into play, each of which dictate the overall viability of an investment in its own way. For instance, if you’re investing in the stock market, there are multiple external forces that contribute to the overall success or failure of any given investment. In the world of real estate investing, there are just as many factors that you will need to consider. Understanding the macroeconomic forces that impact the viability of any given real estate investment is an important part of achieving optimal success in the most popular investment class among millionaires in the world today.

GDP Per Capita Consumption Growth Rate

If you’re going to experience success as a real estate investor, you will need to keep an eye on the GDP per capita consumption growth rate. This statistic, which is presented as a positive or a negative (usually on a graph), is directly related to the job market. If the economy is trending upward and expanding, the growth rate will show as a positive. This expansion of the economy translates to the real estate industry because it results in an increase in jobs, new businesses forming, and more money flowing through the economy.

Obviously, if jobs are more plentiful, people are willing to apply for mortgages or look for rental housing. Additionally, lending institutions are more likely to lend money to people who are working. Interest rates and other factors are lower when the economy is thriving, meaning that real estate investments are more secure.

Term Structure of Interest Rates

Speaking of interest rates, they are one of the most important factors on the real estate industry. The term structure of interest rates is a critical factor in considering a country’s current economic state. The phrase “term structure of interest rates” refers to the yield curve that indicates the relationship between interest rates of similar quality bonds while factoring in different maturities and terms.

The yield curve serves a variety of purpose, but primarily it is there to give a visual representation of the expectations regarding future interest rates and other monetary changes. In a normal curve, long-term investments yield more favorable profits than their short-term counterparts. However, if the curve flips and goes into a downward trajectory, short-term yields become better than long-term investments. Obviously, the difference between short and long-term investment viability for an investor is largely contingent on the type of asset that you have invested in.

Real Treasury Bill Rate

The federal government issues treasury bills, which are bonds that are sold to investors in denominations ranging between $1,000 and $5 million. These bonds are considered low-risk, making them attractive to investors and generally reach maturity in 12 months or less.

The demand for these bonds, referred to as T-bills, generally operate in conjunction to the expectations of the market. If you notice an increase in T-bill demand, it’s generally an indication of an impending market crash. An increase in T-bill demand generally leads to lower interest rates, which can be good for real estate investors in certain situations.

However, if lower interest rates aren’t a good thing for your personal investment strategy, you can still monitor the T-bill market to get some insight. Longer maturity dates generally equate to higher interest rates.

Unpredicted Inflation

In many cases, economists and other industry experts can predict an increase or decrease in inflation. However, that’s not always the case. Sudden inflation is never a good thing for investors, especially those who have been nurturing an investment over the course of several years. A sharp increase in inflation can have far-reaching, negative impacts on virtually every type of investment, including real estate.

A sudden, sharp increase in inflation makes lending much more problematic. This is especially troublesome for real estate investors who rely on the fix-and-flip model, as it shrinks the potential buyer pool.

Being aware of the macro factors that can impact your real estate investment business is imperative. When you’re aware of what issues can negatively impact your investments gives you a better opportunity to protect your portfolio. This means that you can more effectively build generational wealth that can benefit you and your loved ones for years to come.