At the most basic level, the real estate market is controlled by the laws of supply and demand. Developing a true understanding of the market requires digging a bit deeper, however. There are five important factors that affect both the supply and demand sides of the market, and understanding them is crucial. Those who do can predict the best time to buy or sell a home.

Interest Rates
When interest rates go down, so does the cost of borrowing money. As such, more people are willing to buy. This increase in buyers causes a decrease in inventory that drives both competition for and the price of houses up. High interest rates make buyers think twice, often resulting in too much inventory and lower prices.

The Economy
Economic indicators, like unemployment, income growth and the cost of consumer goods, also impact housing markets. A mortgage is easily a 15- to 30-year commitment, and buyers are more inclined to take the plunge when things look good now and into the foreseeable future. A strong economy usually means more buyers and higher home prices. A weak economy drags home prices down, as fewer people can afford to buy or are willing to do so.

As the population in an area changes, so do the prices of houses in the area. Some aging baby boomers, for example, are reaching an age where retirement homes offer more appeal than single-family units. As boomers are selling their homes, millennials are opting to rent after watching their parents struggle when the real estate bubble burst between 2008 and 2012. The convergence of these two populations and their views on home ownership are resulting in many available homes and no one to buy them, driving prices down in some areas.

Tax Incentives
The government can impact real estate markets through tax deductions and other programs. In 2009, the economy was slow and home sales down. To stimulate both, the government introduced a first-time homebuyer tax credit. The credit led to an additional 900,000 home sales across the nation. As more people bought homes, the demand increased and supply lowered, driving housing prices back up.

In some areas, the real estate market seems to function independently of the rest of the world. Areas like San Francisco, for example, are in high demand all the time thanks to the booming tech industry. In popular areas, there are often far more homebuyers than sellers. As a result, housing prices skyrocket in these places, even when they’re falling in other parts of the country. The same is true in perpetually less desirable areas. When there are more houses than people to buy them, inventory goes up and prices go down.