Real estate economics

Real estate is land and things attached semi-permanently to it (such as buildings and fixtures fastened to buildings like doorknobs and air conditioners). Land, the main component of real estate, is essentially permanent and non-destructible, and non-movable. These are some of the reasons that historically it came to be called real property as opposed to other kinds of property, often called personal property. Land is one of the main inputs to production in many economic models, along with labor and capital.

Bundle of legal rights Edit

Real estate ownership is a bundle of rights. Most countries have laws that treat real estate with legal theory similar to this one. Right to use/occupy/enter it, Right to sell it, Right to lease it, Right to give it away, Right to do all or none of these things. Thus, real estate is not simple to define. To understand which rights a particular real estate includes, research must be done into the history of titles, to show how the bundle of rights were passed on from the original owner to the present owner. Even the lease (or rental) of an apartment is a kind of real estate that is a derivative of the bundle of legal rights of the lessor (particularly if a signed lease or deed is used to convey the right to use the apartment for living). The land has a boundary on the Earth surface, which is carefully described in the deed. Theoretically, all of the universe radiating out from this land, and all of the Earth to the center point directly under this land, is also part of the real estate. In practice, however, rights to do anything with that space and Earth would be impractical and unsupportable by law. The earth cannot be dug to any depth, for example, because it could cave in and effect the safety of neighbors. Through legal precedent and actual covenants and restrictions on the passing of title from owner to owner, many rights have been excluded from the real estate that may have been a part of it. The rights to the water and minerals underneath have probably been sold off a long time before the contract was made. Easements are rights that non-owners have to the real estate that are basically in the public interest. Airplanes can fly overhead, and people can cross the property to get to or from their own property, for instance. The renter of the apartment (or owner of the condominium) has also not gotten the rights to exclude others from the yard or the building. They have only retained the right to the inside of the unit for a certain amount of time (in the case of a condominium owner, indefinately, which right can be re-sold). The lessor retains all of the real estate that has not been passed on to the lessee, for example, the right to modify the landscape and building and the right to use or sell the real estate in perpetuity after the expiration of the lease period.

Variables that effect values Edit

The value of real estate is effected by millions of variables, known and unknown. The law of supply and demand applies when the definition of real estate is clear and legally defensible, and when the trading of it is free for buyer and seller. Buyers obtain the rights to use or sell the real estate in perpetuity (or a defined time limit if the perpetual rights have been excluded in the passing of the real estate). Because buyers get to use the land, they are getting something valuable for the sales price. That value is different (as with all products) for every potential buyer. Real estate has a value in re-sale that is usually associated with its "highest and best use". That means, for example, that if the owner values it at $100,000 for residential purposes, but a commercial area has developed around it making it worth $500,000 for commercial purposes, then the value of the real estate tends to be closer to the higher figure. The value is not the highest that anybody would be willing to pay for it, though, because that amount can be unknown. One commercial developer may value the same real estate at $1,000,000, but can buy it for $500,000 if that is all that other commercial developers are willing to pay for it. Other factors are the values of similar real estate in the area, and levels of employment and infrastructure that contribute to the value of living in that area. Another factor is regulatory. When laws change that give buyers a tax deduction or restrict what they can do with real estate, those laws affect the values.