Real estate refers to the land and any fixed structures or enhancements that are connected to the land, whether natural or man-made. Real estate is considered a type of real property, distinct from personal property, which includes items like vehicles, boats, jewelry, furniture, and farm equipment that are not permanently affixed to the land.
Understanding Real Estate
The terms land, real estate, and real property are frequently used synonymously, although there exist differences.
Land encompasses the earth’s surface extending from its core to the atmosphere above, encompasing trees, minerals, and water. It possesses traits of immobility, indestructibility, and distinctiveness, with each piece of land having its own geographical distinctions.
Real estate includes the land and any permanent man-made structures, like houses and buildings. An improvement refers to any modifications or enhancements to the land that impact the value of the property.
After the enhancement of land, the combined quantity of capital and labor utilized for constructing the improvement forms a substantial fixed investment. While structures can be demolished, permanent improvements such as drainage, electricity, water, and sewer systems tend to endure.
Real property refers to both the land and the additions made to it, alongside the rights that come with owning and using it.
Real Estate Agents
Real estate agents provide support to individuals, businesses, and investors in various real estate transactions involving the purchase and sale of properties. Typically, the industry is segmented into specialized areas. Listing agents, also known as sellers, aid in finding potential buyers by utilizing resources such as the Multiple Listing Service or their personal networks in the profession.
Firstly, they determine the value of your property by examining listings of recently sold homes that are similar to yours, commonly referred to as “comparables” or “comps.” Secondly, they offer guidance on enhancing the appearance of your property to appeal to potential buyers. Lastly, they aid in negotiating with the buyer or the buyer’s representative in order to secure the most favorable price.
Buyers’ agents offer comparable services to those in search of a home. Their knowledge of the local market enables them to locate a property that aligns with your primary requirements. Additionally, they conduct price comparisons, commonly known as “doing comps.”
Buyers’ agents assist in identifying affordable areas, negotiate on your behalf to justify a reduced price, and provide support in dealing with legal aspects such as title search, inspection, and financing.
How Real Estate Works
Real estate plays a crucial role in the U.S. economy as it is a key contributor to economic growth. It serves as an investment or an acquisition fulfilling the requirements of both individuals and businesses.
Real estate, sometimes known as “real property,” is essentially land combined with any physical improvements that may be situated on or installed within it.
When a building or a roadway is constructed in a certain location, it is considered an improvement. Similarly, if something like a septic system is installed underground, it also counts as an improvement. The presence of any of these structures on a piece of land determines its classification as “improved.” Conversely, if the land lacks these structures, it is referred to as “unimproved.”
Real estate consists of various aspects that encompass its progression from undeveloped to developed. It can be acquired or disposed of and may be under the ownership of a government, corporate body, or an individual. Specific elements within it, like the continuous enhancement of land and the individuals or entities involved in the transactions, have a direct influence on the economy.
Types of Real Estate
Residential real estate refers to any property utilized for residential purposes, encompassing various types such as single-family homes, condos, cooperatives, duplexes, townhouses, and multifamily residences.
Commercial real estate refers to any property that is dedicated solely to conducting business operations, including apartment complexes, gas stations, grocery stores, hospitals, hotels, offices, parking facilities, restaurants, shopping centers, stores, and theaters.
Industrial real estate refers to any property that is utilized for purposes such as manufacturing, production, distribution, storage, and research and development.
Land encompasses various types of properties, including undeveloped areas, vacant land, and agricultural lands, such as farms, orchards, ranches, and timberland.
Special purpose refers to property that is accessible to the general public, including public cemeteries, government buildings, libraries, parks, places of worship, and schools.
The Economics of Real Estate
Real estate plays a crucial role in driving economic growth in the U.S., and the U.S. Census Bureau releases housing starts data, which indicates the number of new residential construction projects in a specific month, serving as a significant economic indicator.
The report contains data on building permits, housing starts, and housing completions for different types of homes, including single-family homes, homes with 2-4 units, and multifamily buildings with five or more units, like apartment complexes.
Housing starts are closely monitored by investors and analysts as they offer insight into the overall economic direction. Additionally, the varying types of new housing starts offer indications of the economy’s development.
If there is a decrease in the number of single-family housing starts and an increase in the number of multifamily housing starts, it may suggest that there will soon be a shortage of single-family homes available, leading to an increase in home prices. The chart provided displays housing starts over a period of 20 years, starting from January 1, 2000, and ending on February 1, 2020.
Understanding Real Estate Market Numbers and Data
New home construction statistics play a crucial role as leading economic indicators by providing insights into the future of the housing market. Each month, the Census Bureau furnishes reports on new housing starts and completions.
If housing starts were to decline while home sales remained steady, it would have a negative impact on the homebuilding industry. Each of these indicators provides a unique insight into the industry’s overall health.
The possibility of buyers being unwilling to wait beyond a year for the completion of a home can arise. Additionally, a decrease in housing starts may indicate a scarcity of materials such as lumber and concrete, as well as a shortage of construction workers. These shortages can result in increased costs and sales prices.
If there is a decrease in mortgages, the homebuilder will have a stock of homes for sale that are not sold. Even if there is a high demand, homeowners are unable to obtain mortgages. While an increase in home starts may appear to indicate a strong housing market, a decrease in home closings suggests that the housing market is actually weak.
There are three additional indicators that are crucial to monitor.
- Inventory: The total number of homes that are available for sale (but unsold) reported by the NAHB monthly
- Months of supply: How many months it would take to sell all the houses in inventory based on the sales rate and inventory, also reported by the NAHB monthly
- Sales prices: The median and average new home sales price
The Census Bureau gives information on the prices of newly sold homes, while the National Association of Realtors releases monthly reports containing details about the average price and number of homes that have been sold again.
Resale data is a more reliable measure of the housing industry’s health compared to new home construction since new home builders may exaggerate their expectations for future sales. These eager builders may end up constructing an excessive number of homes or reducing prices significantly in order to stimulate sales.
Investing in Real Estate
There are several common methods of investing in real estate, such as owning a home, owning rental properties, and flipping houses. A specific type of real estate investor is a wholesaler who signs a contract with a seller for a property and then locates a buyer. Wholesalers typically focus on distressed properties and do not engage in any renovations or additions.
The revenue generated from rent or leases, as well as the increase in the value of the real estate, constitute the earnings obtained from investment in real estate.
The year-end 2021 U.S. home sales report, overseen by ATTOM, reveals that home sellers across the country gained a profit of $94,092, resulting in a 45.3% return on investment. This represents a 45% increase from $64,931 in 2020 and a 71% increase from $55,000 two years ago.
The value of real estate can be influenced by various factors including its location, employment rates, the local economy, crime rates, transportation facilities, school quality, municipal services, and property taxes.
Investing indirectly in real estate involves utilizing a real estate investment trust (REIT), which is a company that possesses a collection of income-generating real estate. REITs come in different forms, namely equity, mortgage, and hybrid REITs, and are categorized based on the method of buying and selling their shares, including publicly-traded REITs, public non-traded REITs, and private REITs.
The most common approach to investing in a REIT is by purchasing publicly traded shares on an exchange. These shares are traded similarly to other securities on an exchange, such as stocks, which ensures high liquidity and transparency for REITs.
Income generated from REITs is obtained by means of receiving dividends and experiencing an increase in the value of the shares. Apart from individual REITs, investors also have the option to engage in trading real estate mutual funds and real estate exchange-traded funds (ETFs).
One alternative for investing in real estate is through mortgage-backed securities (MBS), including the Vanguard Mortgage-Backed Securities ETF (VMBS) comprising federal agency-backed MBS with at least $1 billion pools and a minimum maturity period of one year. Another option is the iShares MBS ETF (MBB), which concentrates on fixed-rate mortgage securities and mirrors the performance of the Bloomberg U.S. MBS Index.
The assets it possesses consist of bonds that are either issued or guaranteed by government-sponsored enterprises like Fannie Mae and Freddie Mac.
