The real estate economy is the application of economic techniques to the real estate market. It tries to describe, explain, and predict patterns of prices, offers, and requests. The closely-tied realm of the housing economy is narrower in scope, concentrating on the residential real estate market, while the real estate bolding research focuses on business and structural changes affecting the industry. Both use partial equilibrium analysis (supply and demand), urban economy, spatial economy, extensive research, surveys, and finance.
Video Real estate economics
Overview of the real estate market
The main participants in the real estate market are:
- Owners/users : These people are both owners and tenants. They buy a home or commercial property as an investment and also to live or utilize as a business.
- Owner : These people are pure investors. They do not consume the real estate they buy. Usually they rent or rent property to others.
- Tenants : These people are pure consumers.
- Developers : These people are setting up raw land for buildings, which produce new products for the market.
- Renovator : These people provide updated buildings to the market.
- Facilitator : This group includes banks, real estate brokers, lawyers, and others that facilitate the purchase and sale of real estate.
Owners/users, owners, and tenants form the demand side of the market, while developers and updating experts form the supply side. To apply simple supply and demand analyzes to the real estate market, a number of modifications need to be made to standard microeconomic assumptions and procedures. In particular, the unique characteristics of the real estate market should be accommodated. These characteristics include:
- Endurance. Real estate is durable. A building can last for decades or even centuries, and the ground underneath is practically indestructible. Therefore, the real estate market is modeled as a stock/flow market . Around 98% of the supply consists of existing stock of houses, while about 2% consists of new development flows. The stock of real estate inventories in each period is determined by the existing stock in the previous period, the extent of damage to existing stock, the extent of existing stock renovations, and the flow of new developments in the current period. The effect of adjusting the real estate market tends to be mitigated by the relatively large stock of existing buildings.
- Heterogeneity. Each real estate unit is unique in terms of location, building, and financing. This makes prices difficult, increases search costs, creates information asymmetry, and severely limits substitution. To solve this problem, economists, beginning with Muth (1960), define supply in terms of service units; that is, any physical unit can be deconstructed into the services it provides. Olsen (1969) describes these housing service units as unobservable theoretical constructs . Housing stocks depreciate, making it qualitatively different from new buildings. The process of market balance operates at various levels of quality. Furthermore, the real estate market is usually divided into residential, commercial, and industrial segments. It can also be subdivided into subcategories like recreation, revenue generation, historical or protected, and the like.
- High transaction costs. Buying and/or moving to home costs far more than most types of transactions. Fees include search fees, real estate fees, moving costs, legal fees, land transfer taxes, and registration fees deed. Transaction fees for sellers typically range between 1.5% and 6% of the purchase price. In some countries in continental Europe, transaction costs for buyers and sellers can range between 15% and 20%.
- Long delays. The market adjustment process is subject to time delays due to the length of time it takes to finance, design and build new supply and also because of the relatively slow rate of change in demand. Because of this lag, there is great potential for disequilibrium in the short term. Adjustment mechanisms tend to be slow relative to more liquid markets.
- Good investment and consumer goods. Real estate can be bought in the hope of getting a return (investment item), with a view to using it (consumer goods), or second. These functions can be separated (with market participants concentrating on one or the other functions) or combined (in the case of people living in their own homes). This good duality means that it is not uncommon for people to invest excessively in real estate - that is, to invest more money in an asset than is valuable in the open market.
- Immobility. Real estate is not mobile-active (except for mobile homes, but the ground beneath it still can not move). Consumers are better than good consumers. Therefore, there is no physical market. This spatial precision means that market adjustments should be made by people moving into residential units, rather than the movement of goods. For example, if tastes change and more people demand suburban homes, one should look for suburban housing, as it is impossible to bring existing houses and land to the suburbs (even homeowners, who can move houses, many new ones). Spatial compatibility combined with the proximity of housing units in urban areas shows the potential for externalities inherent in certain locations.
Maps Real estate economics
Request for housing
The main determinant of demand for housing is demography. But other factors, such as income, housing prices, cost and availability of credit, consumer preferences, investor preferences, replacement prices, and complementary prices all play a role.
The core demographic variable is population size and population growth: the more people in the economy, the greater the demand for housing. But this is too simplistic. Consider family size, family age composition, number of first and second children, net migration (immigration minus emigration), establishment of non-family households, number of double family households, mortality rate, divorce rate, and marriage. In the housing economy, the elemental analysis unit is not an individual, as in the standard partial equilibrium model. Instead, it is a household, which demands housing services: usually one household per house. Household demographic sizes and composition are varied and not entirely exogenous. This is endogenous to the housing market in the sense that when the price of housing services increases, the size of households will also tend to increase.
Revenue is also an important determinant. The empirical measure of the elasticity of demand income in North America ranges from 0.5 to 0.9 (De Leeuw 1971). If permanent income elasticities are measured, the results are slightly higher (Cain and Quigley 1975) because transitory income varies from year to year and between individuals, so positive transitory income will tend to cancel negative transitory income. Many residential economists use a permanent income rather than annual income because of the high cost of buying real estate. For many people, real estate will be the most expensive item they ever bought.
Housing prices are also an important factor. The price elasticity of demand for housing services in North America is estimated to be negative 0.7 by Polinsky and Ellwood (1979), and negative 0.9 by Maisel, Burnham, and Austin (1971).
The demand for individual household housing can be modeled on the utility standard/theoretical choice. Utility functions, such as U = U (X1, X2, X3, X4,... Xn), can be built, where household utilities are a function of various goods and services (Xs). This will be subject to budget constraints such as P1X1 P2X2... PnXn = Y, where Y is the available household income and Ps is the price for various goods and services. Equity shows that the money spent on all goods and services should be equal to the available income. Since this is unrealistic, the model should be tailored to allow for borrowing and storage. A measure of wealth, lifetime income, or permanent income is required. The model must also be adjusted to take into account the heterogeneity of real estate. This can be done by deconstructing the utility function. If the housing service (X4) is separated into its constituent components (Z1, Z2, Z3, Z4,... Zn), utility functions can be rewritten as U = U (X1, X2, X3, (Z1, Z2, Z3, Z4,... Zn)... Xn). By varying the price of housing services (X4) and splitting for optimum utility points, the timetable of household demand for housing services can be built. Market demand is calculated by summing up all individual household requests.
Housing supply
Residential supplies are produced using land, labor, and various inputs, such as electricity and building materials. The number of new supplies is determined by these input costs, the stock prices of existing houses, and production technology. For single-family residences on the periphery of North America, the estimated percentage of costs may be described as follows: cost, 10%; site repair costs, 11%; labor costs, 26%; material cost, 31%; financial costs, 3%; administration fee, 15%; and marketing costs, 4%. Multi-unit residential homes usually break down as follows: acquisition costs, 7%; site repair costs, 8%; labor costs, 27%; material cost, 33%; financial costs, 3%; administration fee, 17%; and marketing costs, 5%. The requirements of public subdivision may increase development costs by up to 3% depending on jurisdiction. Differences in account code building about 2% variation in development costs. However, the division and building cost of this code usually increases the value of the building market at least by the amount of their expenses. Production functions like Q = f ( L , N , M ) can be built where Q is the number of homes produced, N is the amount of labor used, L is the amount of land used, and M is the number of other materials. This production function should, however, be adjusted to explain the improvement and augmentation of existing buildings. To do this, a second production function is built that includes the stock of existing housing and their age as determinants. Both functions are summed, producing a total production function. Alternatively, the hedonic pricing model can be re-aggressed.
Long-term supply price elasticity is quite high. George Fallis (1985) estimates it to be 8.2, but in the short run, supply tends to be very inelastic in price. The price elasticity of the supply depends on the elasticity of substitution and supply restrictions. There is a significant substitution, both between land and material and between labor and material. In high-value locations, concrete buildings are usually built to reduce the amount of expensive land used. Since labor costs have increased since the 1950s, new materials and capital-intensive techniques have been used to reduce the amount of labor used. However, supply restrictions can significantly affect substitution. In particular, the lack of supply of skilled labor (and union requirements) may limit the substitution of capital into labor. The availability of land can also limit the substitution if the area to be visited (ie larger area, more land supplier, and more possible substitution). Control of land use such as zoning regulations can also reduce land substitution.
Setup mechanism
The basic adjustment mechanism is a stock/flow model to reflect the fact that about 98% of the market is in stock and about 2% is the flow of new buildings.
In the adjacent diagram, the inventory housing inventory is presented in the left pane while the new stream is in the right pane. There are four steps in the basic adjustment mechanism. First, the initial equilibrium price ( Ro ) is determined by the intersection of existing housing stock supply ( SH ) and demand for housing ( D ). This lease is then translated into the value ( Vo ) through a cash flow deduction. The value is calculated by dividing the lease of the current period by the discount rate, that is, as the duration. The value is then compared to the construction cost ( CC ) to determine whether a profitable opportunity exists for the developer. The intersection of construction costs and the value of housing services determines the maximum level of new housing starts ( HSo ). Finally the number of housing starts in the current period is added to the stock of housing available in the next period. In the next period, the SH supply curve will shift to the right with HSo amount.
Adjustments to depreciation
The diagram to the right shows the depreciation effect. If the supply of existing housing deteriorates due to wear and tear, then the stock of housing inventories depreciates. Therefore, the housing supply ( SHo ) will shift left (to SH1 ) resulting in a new equilibrium request R1 (as the number of homes decreases, but the demand still available). Increasing the request from Ro to R1 will shift the function of the value up (from Vo to V1 ). As a result, more homes can be produced profitably and housing starts will increase (from HSo to HS1 ). Then the housing supply will shift back to its original position ( SH1 to SHo ).
Increased demand
The diagram on the right shows the effect of increasing demand in the short run. If there is an increase in demand for housing, such as a shift from Do to D1 there will be a price or quantity adjustment, or both. In order for prices to remain the same, housing supply should increase. That is, the supply of SHo should be increased by HS .
Cost increase
The diagram on the right shows the effect of cost increases in the short run. If construction costs increase (say from CCo to CC1 ), developers will find their business less profitable and will be more selective in their business. In addition, some developers can leave the industry. Quantity of housing starts will decrease ( HSo to HS1 ). This will ultimately reduce the inventory level (from SHo to SH1 ) as the housing stock depreciates. Prices will tend to rise (from Ro to R1 ).
Real estate financing
There are various ways of real estate financing: governmental and commercial sources and institutions. A home buyer or builder can get financial help from savings and loan associations, commercial banks, savings banks, mortgage bankers and brokers, life insurance companies, credit unions, federal agencies, individual investors, and builders.
Savings and loan associations
The most important objective of these institutions is to make mortgage loans on residential property. These organizations, also known as savings associations, buildings and loan associations, cooperative banks (in New England), or homestead associations (in Louisiana), are the main source of financial aid to most American homeowners. As a home finance institution, they pay particular attention to single family residence and are equipped to lend in this area.
Some of the most important characteristics of saving and loan associations are:
- Generally this is a locally owned and privately-run home finance institution.
- Accept individual deposits and use these funds to make long-term loans with amortization to home buyers.
- It makes loans for building, purchasing, repairing, or refinancing homes.
- This is a state or federal charter.
Commercial bank
Due to changes in banking laws and policies, commercial banks are increasingly active in home finance. In obtaining mortgages in real estate, these institutions follow two main practices:
- Some banks maintain an active and well-organized department whose primary function is to compete actively for real estate loans. In areas where there is no special real estate financial institution, these banks are the source of mortgage loans for housing and agriculture.
- The bank acquired a mortgage simply by buying from a mortgage banker or dealer.
In addition, the dealer services company, originally used to obtain car loans for permanent lenders such as commercial banks, wants to expand their activities outside of their local area. However, in recent years, these companies have concentrated to obtain mobile home loans in volumes for both commercial banks and savings and loan associations. Service companies get this loan from retail dealers, usually on a non-recourse basis. Almost all bank agreements or service companies contain a credit insurance policy that protects the creditor if the consumer fails.
Savings Bank
These financial depository institutions are federally rented, especially accepting consumer deposits, and providing home mortgage loans.
Bankers and mortgage brokers
A mortgage banker is a company or individual that comes from a mortgage loan, sells it to other investors, serves monthly payments, and can act as an agent to funnel funds for taxes and insurance.
Mortgage brokers present home buyers with loans from various sources of loans. Their income comes from the lender who makes the loan, as is the case with other banks. Because they can take advantage of various lenders, they can shop on behalf of the borrower and reach the best available terms. Although legislation that can support major banks, mortgage bankers and brokers keep the market competitive so the largest lenders should continue to compete in price and service. According to Don Burnette of Brightgreen Homeloans in Port Orange, Fla., "Mortgage bankers and broker channels are crucial to maintaining a competitive balance in the mortgage industry, without which the largest lenders will be too affected tariffs and prices, potentially hurt. the industry is continuing to improve their performance, and consumers are the winners in this scenario. "
Life insurance company
Life insurance companies are another source of financial aid. These companies lend real estate as one form of investment and adjust their portfolios over time to reflect changes in economic conditions. Individuals seeking loans from an insurance company can deal directly with a local branch office or with a local real estate broker who acts as a loan correspondent for one or more insurance companies.
Credit unions
These cooperative financial institutions are managed by people who have a common bond - for example, company employees, unions, or religious groups. Some credit unions offer home loans in addition to other financial services.
Federally supported agencies
Under certain conditions and limited funds, the Veterans Administration (VA) makes direct loans to credit-worthy veterans in areas of housing credit deficiency designated by VA administrators. These areas are generally rural and small towns and towns not near metropolitan or commuter areas in big cities - areas where GI loans from private institutions are not available.
The government-backed institutions mentioned here do not include so-called second-tier lenders who enter the scene after mortgages are arranged between lending institutions and individual home buyers.
Trust real estate investments
The real estate investment trust (REIT), which began when the Real Estate Investment Investment Law came into force on 1 January 1961, is available. REITs, such as savings and loan associations, are committed to real estate loans and can and do serve the national real estate market, although several specializations have taken place in their activities.
In the United States, REIT generally pays little or no federal income tax but is subject to a number of special requirements set forth in the Internal Revenue Code, one of which is a requirement for each year to distribute at least 90% of their taxable income in the form of dividends to shareholders.
Other sources
Individual investors are a sizable source of money but somewhat downhill for home mortgage loans. Experienced observers claim that these lenders prefer short-term liabilities and usually limit their lending to less than two-thirds of the value of residential properties. Similarly, a building contractor sometimes receives a second mortgage with a partial payment of a house's construction price if the buyer can not raise the total advance amount above the first mortgage money offered.
In addition, home buyers or builders can save their money using FSBO to not pay additional fees.
See also
- Affordable housing
- Housing affordability in Great Britain
- Australian property market
- Gross effective revenue
- Investment rating for real estate
- Real estate trends
- Short sale (real estate)
- the housing bubble of the United States
Note
References
- Bourne, L.S. and Hitchcock, J.R. editor., (1978) Urban Housing Market: The latest direction in research and policy , University of Toronto Press, Toronto, 1978.
- De Leeuw, F. (1971) Demand for housing, Review of cross-sectional evidence, Overview of Economics and Statistics , vol. 53, no. 1, pp.Ã, 1-10.
- Fallis, G. (1985) Housing Economy , Butterworth, Toronto, 1985.
- Harris, Richard. "Resurrection Screening Down: The American Housing Market Changed, 1915-1929," History of Social Sciences 37 (Winter 2013), 515-49.
- Fabrics J.F. and Quigley J.M. (1975) Market Housing and Racial Discrimination , National Economic Research Bureau, New York.
- Maisel S.J., Burnham J.B., and Austin J.S. (1971) Demand for housing, Economic and Statistical Review , Vol. 53, p. 410-413.
- Muth, R. (1960) "The demand for non-residential farm", in ACHarberger, ed., Demand for durable goods , University of Chicago Press, Chicago, 1960.
- Olsen, E.O. (1969) "A theory of housing market competition", Overview of the American Economy , Vol. 59, pp.Ã, 612-622.
- Polinsky A. M. and Ellwood D.T. (1979) Empirical reconciliation of micro and group estimates of demand for housing, Economic and Statistical Review , vol. 61, pp.Ã, 199-205.
External links
- Humboldt Real Estate Economics: real estate market conditions in Humboldt County, California by the Department of Economics at Humboldt State University.
- Grant Thornton International Business Report: 2008 Construction and focus of the real estate industry
- Numbeo: users are contributing databases on residential/real estate prices around the world and their indicators
- Modified Eden: Pasadena, Sierra Madre, and Their First Real Estate Boom By George A. Crofutt: Boom of Eighties Southern California
- Jose Francisco Bellod Redondo, University of Malaga, Detection of real estate bubbles: the case of Spain: the performance of the Spanish housing market between 1989 and 2009 (in Spanish), May 2011
- Diana RÃÆ'¡dl RogerovÃÆ'¡; Filip Endal; Petr HÃÆ'¡na; Pavel Novák (May 2012). "Overview of the European Residential Market" (PDF) . Deloitte Czech Republic.
Source of the article : Wikipedia
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