4 Key Components of Speculation in the Real Estate Sector

By Scott Roberts

Real estate prices in the U.S. have aggressively increased in the last few years, attracting the attention of speculators and investors alike. Home prices increased 11.3% last year, and Zillow predicts housing prices will be up an additional 19.5% at the end of this year.[1] Furthermore, real estate properties average 13% return annually,[2] not to mention the valuable tax benefits of owning real estate. While both speculators and investors aim to profit by the eventual re-sale of properties, these strategies have some important differences regarding the levels of effort and risk taken. This article will discuss the key differences between speculators and investors in the real estate sector, and what practices each strategy involves.

First, let’s take a look at the definition of real estate speculation. According to the Official Real Estate Agent Directory, real estate speculation is essentially buying a property when property prices are low, and reselling it when property prices rise.[3] Similar to foreign exchange speculators, or even stock market speculators, real estate speculators make a calculated prediction on the market cycle in order to time both their purchase and sale profitably. Although it is a ‘calculated’ prediction, speculation involves a ton of risk, as there are countless factors that affect the real estate market, and not all factors can be properly accounted for. Therefore, there is a great level of uncertainty and risk. Even if you are an expert speculator, price will respond to unforeseeable factors, which could lead to massive profits, or unlimited losses.

Now that we have defined speculating, let’s dive deeper into the factors this strategy utilizes. For instance, let’s explore the main factors speculators analyze when trying to paint an accurate picture of the future market, as this is essential to how they time their acquisitions. There are four core factors that speculators heavily analyze before purchasing or selling a property: demographics, interest rates, the economy, and government policies.[4]

Demographics like population, age, race, gender, income, migration patterns, and population growth are of huge importance, as these demographics make up the demand for real estate. For example, one demographic getting a lot of attention right now is age, as Millennials are expected to make up over a third of total home buyers right now.[5] Since Millennials are going to continue driving the demand for housing, speculators can count on continued price growth.

Interest rates are also important, because if interest rates rise, loans to purchase a property will become more expensive. However, if rates lower, mortgage costs will lower, increasing demand and therefore prices. Additionally, speculators need to consider the overall economy. The real estate market usually mimics the economy, so it is important to monitor economic gauges like GDP, employment data, CPI, and other relevant measures. Lastly, government policies are relevant, as tax deferrals such as the 1031 exchange are critical to success in the real estate sector. President Joe Biden’s massive 1.8 trillion deal initially moved to eliminate the 1031, causing widespread panic amongst the real estate sector. Thankfully, the 1031 exchange was spared, along with the hope and dreams of anyone hoping to directly invest in real estate. In contrast to real estate speculation, we have real estate investing. While real estate investors also want to time the market profitably, investors’ focus more so on adding value to the property, rather than solely relying on market timing for profits. As a result, investing requires much more time and effort, as investors need to pay attention to consumer trends, acquire funds for renovations, and negotiate with rental tenants. If done correctly, directly investing results in much less risk of losses, and a higher probability of profit.

Overall, given the ever-growing demand in the real estate market, both investors and speculators are in great positions to make a profit. While I personally would prefer to invest in real estate, directly adding value components to a property, speculators can also succeed greatly by accurately timing the market. When it comes to real estate management styles, it is a matter of risk preference and comfortability. For those who feel are comfortable with lots of risk, and believe they have a great pulse on the market, speculation is a great opportunity. For people like me who are more uncertain of the market’s direction, directly investing in value-adding renovations is a less risky way to profit.

[1] Marco Santarelli, “Housing Market Forecast 2022: Will It Crash or Boom in 2022”, Norada REI, 2021, https://www.noradarealestate.com/blog/housing-market-predictions/ [2] Jussi Askola, “Buying A Rental Property Vs. Stocks: Which Is A Better Investment?”, Seeking Alpha, 2019, https://seekingalpha.com/article/4234001-buying-rental-property-vs-stocks-which-is-better-investment [3] Lewis Temple, “What is real estate speculation?”, Donna Kerr Group, 2021, https://www.realestateagent.com/real-estate-glossary/real-estate/real-estate-speculation.html [4] Joseph Nguyen, “4 Key Factors That Drive the Real Estate Market”, Investopedia, 2021, https://www.investopedia.com/articles/mortages-real-estate/11/factors-affecting-real-estate-market.asp [5] Natalie Campisi, “Are We At Risk For A Housing Bubble? Here’s What The Experts Are Saying”, Forbes, 2021, https://www.forbes.com/advisor/mortgages/housing-bubble-experts/