Understanding Capital Markets Can Lead to Consistent Success
The Effect the Markets Have on Investor Activity
By Mitchell Zagrodnik
It is no secret that the real estate investment space has been growing consistently over the past few decades. Whether someone is looking to purchase a property, renovate it, and then flip it for a profit, or they just want to purchase a nice cash-flowing rental property for passive income, there are multiple avenues investors can take to lead to a prosperous career in real estate investing.
But as the second half of 2022 led to swings in the market due to rate increases, 2023 has started off with a more conservative outlook in the space, with most people wondering how the market is going to play out.
Experienced investors who have been in the industry for decades have seen the worst of the worst, with the 2008 housing market crash. Newer investors are seeing their first volatile market after a few years of a very favorable market and low rates, and may be wondering how to navigate this new playing field. Looking at capital markets data and being able to identify trends in the market are a great way to stay ahead of the game and prepare for the future.
What are Capital Markets?
The definition of capital markets as described by Oxford Languages is “the part of the financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments.”
In real estate, the industry has its own particular capital markets, which are designed to accommodate the needs of investors and developers. Through this structure, businesses can gain capital by issuing securities to investors, who with these purchases, hope to earn solid returns on their investments. Overall, these markets are meant to act as a framework for how assets are valued, financed, and transacted from businesses to investors. And as investors, it is beneficial to have an overall understanding of how not only to invest in the real estate market, but to put in the time and research to better comprehend how your purchases fit into the grand scheme of the market.
Real estate capital markets consist of both primary and secondary markets, and both are key factors of the financial system. The primary market is where the loans are originated, and then once they are created they can then be traded with investors either as securities or as some other type of financial instrument. The secondary market acts as a channel for the funds to get in the hands of investors in order to fuel investment activity and lead to a stable and functioning economy. Since mid-2022, the economy has been fluctuating and the Fed has taken steps to try and stabilize it through constant rate hikes that have a ripple effect on the real estate investment space.
The Effect the Markets Have on Investor Activity
Since the second half of 2022, interest rates have been on the rise and because of this, they have a heavy impact on real estate transactions. When interest rates increase, the cost of capital increases making real estate investments less profitable and lowers the demand for these assets. This is a prime example of what we have seen happening in the market since the middle of 2022. The consistent and frequent increases in interest rates led to overall lower valuations of assets, having ramifications throughout the market. When interest rates are lower it is the opposite, costs are lower and real estate investments are more attractive. It all comes down to returns on the investments.
With higher rates that have continued to rise, projected returns are lower, and the uncertainty on where price points will land on these acquisitions is leading some investors to steer clear. Where will the property value appraise at? How much longer is the Fed going to continue to raise rates? These are questions that many investors are asking, but there are also those investors that can read the market and current trends, and because of that they are looking past the short-term volatility and focusing on the opportunities in the long run.
The Trends You Should Look For
Whether you are new to the real estate investment space or a long-time veteran, it is important to always have a student mindset. Even in times of consistency in the market, it is imperative to always be prepared for when the market gets more fluid and unpredictable. There are trends and data in the market that investors should always keep an eye on. A good place to start is by keeping an eye on housing supply and demand. In real estate for every action, there is always a reaction, so when supply is lower, demand is usually driven up. The same is said for the inverse, when supply is there then the prices are likely to lower.
Looking at housing starts and building permits as well is a great way to stay ahead of the curve. If there is an increase, then that could potentially lead to a rise in housing prices. Also, keeping an eye on migration patterns throughout the United States can be a good indication of market conditions to come. Housing is expensive, especially in big metropolitan areas, and that trend seems likely to continue as prices and rents continue to soar to record levels. Even with the recent efforts to slow down appreciation, there has been little impact to help with affordability. Factors like low inventory and difficulties with new builds contribute to this as well, among other issues. Regardless, people are leaving the expensive areas and moving to smaller, more affordable areas. These are just some of the patterns and trends to be aware of as investors in a changing market.
Getting Ahead in a Changing Market
Real estate capital markets are the engine that makes that industry run. They provide investors with the opportunity to receive capital in order to help fund their real estate projects, whether that be rehabbing and selling a property or looking to secure an existing property for long-term passive income as a rental. Grasping an understanding of this data and how it affects you as an investor can be extremely beneficial for navigating a more fluid market, as well as growing your wealth of knowledge. Taking the time to look for the trends can set you apart from other investors in the space and give you an advantage in a changing market.
