Friday, November 30, 2007
Real estate economics is the purpose of economic techniques to real estate markets. It tries to describe, give details, and predict patterns of real estate prices, building production, and real estate utilization. The closely related fields of housing economics is narrower in scope, intent on residential real estate markets as does the research of real estate trends focus on the business and structural changes impacting the industry. Both draw on partial equilibrium analysis, urban economics, spatial economics, far-reaching research, surveys and finance.
The main participants in real estate markets are:
Durability: Real estate is durable. A building can last for decades or even centuries, and the land underneath it is virtually indestructible. Because of this, real estate markets are modeled as a store/flow market. About 98% of supply consists of the stock of accessible houses, while about 2% consists of the flow of new development. The stock of real estate supply in any period is determined by the existing stock in the previous period, the rate of worsening of the existing stock, the rate of renovation of the existing stock, and the flow of new development in the current period. The effect of real estate market adjustments tend to be mitigated by the relatively large stock of existing buildings.
Heterogeneous: Every portion of real estate is unique, in terms of its location, in terms of the building, and in terms of its financing. This makes pricing difficult, increases search costs, creates information irregularity and greatly restricts substitutability. To get around this problem, economists describe supply in terms of service units, that is, any physical unit can be deconstructed into the services that it provides. Olsen describes these units of housing services as an unobservable theoretical construct. Housing stock depreciates making it qualitatively different from a fresh building. The market equilibrating process operates across several quality levels. Further, the real estate market is typically separated into residential, commercial, and industrial segments. It can also be further separated into subcategories like recreational, income generating, area, historical/protected, etc.
High Transaction costs: Buying into a home costs much added than most types of transactions. These costs include search costs, real estate fees, moving costs, legal fees, land relocate taxes, and deed registration fees. Transaction costs for the seller typically range between 1.5 - 6% of the buy price. In some countries in Continental Europe, transaction costs for both buyer and seller can range between 15 - 20%.
Real estate investing involves the purchase of real estate for profit. Profits are accumulated slowly by renting out properties in a cash flow method, or are generally better and resold for a capital gain
The main participants in real estate markets are:
Durability: Real estate is durable. A building can last for decades or even centuries, and the land underneath it is virtually indestructible. Because of this, real estate markets are modeled as a store/flow market. About 98% of supply consists of the stock of accessible houses, while about 2% consists of the flow of new development. The stock of real estate supply in any period is determined by the existing stock in the previous period, the rate of worsening of the existing stock, the rate of renovation of the existing stock, and the flow of new development in the current period. The effect of real estate market adjustments tend to be mitigated by the relatively large stock of existing buildings.
Heterogeneous: Every portion of real estate is unique, in terms of its location, in terms of the building, and in terms of its financing. This makes pricing difficult, increases search costs, creates information irregularity and greatly restricts substitutability. To get around this problem, economists describe supply in terms of service units, that is, any physical unit can be deconstructed into the services that it provides. Olsen describes these units of housing services as an unobservable theoretical construct. Housing stock depreciates making it qualitatively different from a fresh building. The market equilibrating process operates across several quality levels. Further, the real estate market is typically separated into residential, commercial, and industrial segments. It can also be further separated into subcategories like recreational, income generating, area, historical/protected, etc.
High Transaction costs: Buying into a home costs much added than most types of transactions. These costs include search costs, real estate fees, moving costs, legal fees, land relocate taxes, and deed registration fees. Transaction costs for the seller typically range between 1.5 - 6% of the buy price. In some countries in Continental Europe, transaction costs for both buyer and seller can range between 15 - 20%.
Real estate investing involves the purchase of real estate for profit. Profits are accumulated slowly by renting out properties in a cash flow method, or are generally better and resold for a capital gain