Real estate economics

Real estate economics is a branch of financial activity and research concerned with owning, renting, buying, or selling land and buildings and the resulting patterns of supply and demand. Land ownership has been a pillar of world civilizations for thousands of years. In the twenty-first century, the real estate industry affects millions of people and generates trillions of dollars. In the most basic and common real estate transaction, a person agrees to buy or rent a property from a property owner. The property may be a home, a building, a farm, or undeveloped land. Though seemingly straightforward, real estate economics is a complex and important form of financial activity that affects people’s ability to find and afford safe places to live and work.

Overview

Real estate economics is the practice and study of financial principles related to real estate transactions. Modern real estate transactions include the buying and selling of land, houses, or other buildings. These transactions also include renting, which means paying regular (typically monthly) fees to a property owner for the right to live in or otherwise use a property, without transferring ownership rights or responsibilities.

The term real estate refers to land and any buildings or other not-easily-movable structures on the land when viewed in the context of personal property. The most common example of real estate is a home or business building and the land on which it is built. Real estate includes farms and other developed and undeveloped land that people own. Generally, the term also encompasses the natural resources on the land, including water, minerals, or crops.

Although real estate may include some of the most valuable and important possessions of a person or group, it does not include objects not attached to the land, such as cars, boats, furniture, or other goods. Real estate may exist anywhere people live or work, including in rural, suburban, and urban areas. It can range in scope and value from a small, empty dirt lot to a billion-dollar airport, skyscraper, or football stadium.

Real estate is a relatively modern concept in human history. Historically, humans were nomadic, meaning they moved from place to place in search of food, shelter, and other necessary resources. People had little need for permanent living places and may only have stayed in one location for a season, a few weeks, or even just one day or night. Most people likely had little, if any, concept of a permanent place they could own, much less any ideas about using land as a commodity that could be sold or traded.

This practice began to change with the development of agriculture thousands of years ago, which allowed groups of people to settle down in one area for the extended periods necessary to grow crops and raise animals. The accumulation of permanent homes in an area led to villages, then towns, and finally cities. Historians believe the first major cities began in the Middle East in modern-day Turkey and Iraq. Over time, the idea of cities spread, and cities became hubs of leadership, work, learning, and entertainment. Small towns and suburbs grew around the cities, as did agricultural zones whose crops were necessary foods in all areas. As world populations grew, spread, developed, and diversified, land became a precious resource, and the best lands for various purposes took on significant value.

This change in land use and settlement activity ran parallel to major leaps in another major area of human endeavor, economics. Economics refers to the creation, distribution, and use of goods and services, and the study of those processes. The earliest economic activity likely involved bartering or trading one good for another. Later, with the growth of cities and industries, economics grew at a massive rate. The introduction of currency, or coins that represented value, allowed people to buy and sell instead of merely trade.

Economic activity soon encompassed an enormous assortment of goods and services. People in growing civilizations sought more space for expansion, construction, and resources. Land near cities or bodies of water was particularly valuable. It seemed only natural that the desire for land and buildings intersected with the growth of economic activity and gave birth to the first incarnations of the real estate market. In the following centuries, real estate became an individual branch of economic activity and study.

Most modern real estate transactions occur between a seller with real estate and a buyer hoping to acquire real estate. The seller often works through an intermediary known as a real estate agent who carries out much of the often-complicated work—preparing, marketing, and selling processes—in exchange for a commission, or a financial reward, often a previously agreed-upon percentage of the sale price.

Millions of people work in various parts of the real estate industry. Aside from real estate owners, agents, and buyers, other real estate roles include people who develop land, or prepare land for building, and people who renovate or refurbish existing real estate to increase its value and usefulness. Additionally, various third-party facilitators—attorneys, banks, brokers, and government officials—play important roles in the real estate market. They perform tasks such as making loans, crafting policies, and settling land use and ownership disputes.

In the twenty-first century, the real estate industry is a global force whose transactions account for trillions of dollars in economic activity. On a global scale, this industry helps determine the physical structuring and security of society. On a personal scale, the industry allows individuals to find and afford safe, comfortable living spaces. Many industry members are highly trained professionals with a strong background in the principles of real estate economics. Experts, educators, and theorists have long studied the factors of this economic system to determine how it can operate most efficiently.

Further Insights

In many cases, real estate economics operates similarly to other branches of economic study. One of the basic elements of real estate economics is the law of supply and demand. Supply relates to the amount of a good or service that is available. Demand refers to how much people want to acquire these goods or services. In any economy, supply and demand form an ongoing, ever-changing interplay. Experts seek to find a balance between supply and demand that allows the economy to function in the smoothest, most productive and profitable manner.

In real estate economics, supply relates to how much land or how many buildings are available in a given area. Supply may be positively impacted when developers build many new homes in an area, or if people in an area decide to sell their existing homes or land. Alternately, supply may be reduced when no new or existing homes are available. In terms of land itself, supply is limited by the finite amount of living space on the planet. Developers may seek to create supply by draining wetlands or demolishing old buildings to create space for new construction. Generally, it is difficult and costly to create new land, and land that already exists cannot be moved.

Demand relates to the number of people interested in buying land or buildings and the potential buyers’ level of interest. The demand for real estate changes for a variety of reasons. Demand may grow if an area gains a better reputation or new facilities, such as a school or entertainment facility, or if the wider economy improves and people have more money to spend on real estate. Demand may shrink if the overall economy detracts, if an area develops poorer standards or loses resources, or if social trends shift so that fewer people are interested in purchasing land or buildings.

Supply and demand factors change almost constantly based on countless variables in the real estate market and beyond. Experts track these factors and aim to balance them. When imbalanced, the real estate market does not function at peak performance. For example, when many properties are available but relatively few people are interested in acquiring them, the property’s value is likely to decrease. This situation is often called a buyer’s market because it favors buyers. Alternately, if many people want to purchase real estate but relatively few people want to sell, property value is likely to increase, creating a so-called seller’s market.

Experts monitor supply and demand and other crucial trends when planning real estate transactions. They might explore the region where the transaction would occur to analyze the social and economic activity in the area. For example, a developer might notice that businesses in a particular town are thriving or learn that a new business will soon open. Successful businesses will require workers, who will need places to live. Such hints can show that the real estate market in the area is about to strengthen.

Other factors that contribute to the supply and demand of real estate include local rates of death and divorce, the age of the local population, trends in regional investment habits, and the climate and weather typical of the area. National and global trends also impact real estate markets.

Another essential area of study for real estate economists, as well as experts in other economic fields, is demographics. Demographics relate to the characteristics of people in a given population, such as age, sex, income, race, religion, or combinations thereof. This data helps determine how people in an area are likely to behave financially and predict their real estate needs. For example, areas with a population of older adults are likely to experience a higher death rate, meaning that more homes are likely to become available. It may also mean older adults will move into smaller homes or homes that better suit their needs, like ranch-style one-floor dwellings without stairs. Areas with many young couples may experience a high demand for large, family-sized homes to accommodate growing families.

Viewpoints

Real estate economics is closely related to other forms of economics and shares some fundamental concepts, but it differs in many important ways from other forms of financial activity. One difference is in the durability of real estate. Many goods are intended for short-term use, and many services occur only once. Real estate, however, is generally long-lasting. Buildings may last for centuries and underlying land may survive practically forever. This also creates a complication—buildings are difficult and expensive to build and land is difficult (or impossible) to produce artificially.

Some goods and services may exist in large quantities or be mass-produced, but real estate is generally developed and marketed on a one-by-one basis. That means it takes on unique qualities, which become increasingly unique with use and time. For these reasons, multiple parcels of real estate cannot always be sold at a fixed price. Rather, each parcel of real estate usually requires preparation, marketing, and valuation based on its particular qualities and the market at the time of the assessment.

Real estate economics also differs from other forms of economics because it occurs on a larger physical and financial scale. For most people, buying a home or a plot of land is the largest expense they ever incur. Additionally, renovating or having real estate evaluated and put on the market can be surprisingly expensive. These costs are necessitated by the difficulties of making successful real estate transactions. Relatedly, these transactions may take much longer than other economic deals and require more paperwork and regulations.

The real estate industry deals with an essential element of human existence—shelter. Many societies monitor real estate economics to ensure they are fair and provide people with equal opportunities to acquire safe homes. Accommodations in real estate economics may create budgets to help low-income families afford homes or adapt homes for use by people with physical disabilities. Some organizations use volunteer donations and labor to build free or low-cost homes for people in need.

About the Author

Mark Dziak earned his BA in English from King’s College in Wilkes-Barre, Pennsylvania, in 2003 and completed a secondary education program there in 2011. He has worked at Northeast Editing, Inc., since 2004. As a content developer, he researched and wrote hundreds of educational articles, evaluation items, and other resources on various social science topics. In his spare time, Dziak has published numerous works of nonfiction and fiction.

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