Real Esate Markets

                        Real Esate Markets

Real estate is the single largest component of wealth in our society. Because of its magnitude,
it plays a key role in shaping the economic condition of individuals, families, and
firms. It can substantially influence a family’s ability to finance its education, health care,
and other important needs. Changes in the value of real estate can dramatically affect the
wealth of businesses and their capacity to grow.
Similarly, real estate resources can greatly affect a community’s ability to attract
and support profitable business activities, as well as to provide secure, convenient, and
Wealth is not without its advantages and the case to the contrary, although it has often been made,
has never proved widely persuasive.
Affordable living environments for its citizens. The adequacy of the housing stock, as well
as the public infrastructure, including roads, bridges, dams, airports, schools, and parks, all
affect the quality of life in a region.
Real estate has been estimated to represent approximately one-half of the world’s total
economic wealth. 1 In addition, it is often viewed as an important symbol of strength, stability,
and independence. Consider, for example, the symbolic importance of structures
such as Saint Peter’s Basilica in Rome to the Roman Catholic Church or the buildings of
the Forbidden City in Beijing to the Chinese people (see also, Industry Issues 1-1 ). It is not
surprising that real estate has been at the center of many regional disputes. It has been, and
continues to be, a vital resource.

The prominence of real estate means that decisions about it also are important. For the
individual, the firm, and the region, better decisions about the creation and use of real estate
assets will bring greater productivity, greater wealth, and a better set of choices for life.
This book is about making informed decisions concerning real estate. We will show
that virtually all decisions about the acquisition, disposition, or improvement of real estate
depend on some assessment of the real estate’s value. These decisions, which we refer to as
investment decisions, involve comparing the resulting value of an action to its immediate
cost. If the value exceeds the cost, the action should be pursued. The breadth and importance
of these investment decisions in real estate are hard to overstate.
As a beginning, we first look at the different uses of the term real estate. This is followed
by a discussion of land use in the United States and real estate’s contribution to U.S.
and household wealth. The chapter finishes with a discussion of the real estate market, its
participants, and the characteristics that make real estate assets unique.
Real Estate: Some Basic Definitions
It is important at the outset that we define the term real estate, as well as some closely
related terms that are used throughout this book. When people think of real estate, they
often think of the homes in their community or the business of buying and selling houses.
This is probably because the personal investment that most households make in their
home represents their primary involvement in the real estate market. Of course, real estate
includes not only our homes, but also our places of work, commerce, worship, government,
education, recreation, and entertainment—our physical environments, natural and
built. In addition, it includes a wide range of business and institutional activities associated
with the development, purchase, use, and sale of land and buildings.
Real estate is property. The term property refers to anything that can be owned, or
possessed. Property can be a tangible asset or an intangible asset. Tangible assets are
physical things, such as automobiles, clothing, land, or buildings. Intangible assets are
nonphysical and include contractual rights (e.g., mortgage and lease agreements), financial
claims (e.g., stocks and bonds), interests, patents, or trademarks.
The term real estate is used in three fundamental ways. First, its most common use
is to identify the tangible assets of land and buildings. Second, it is used to denote the
“bundle” of rights that are associated with the ownership and use of the physical assets.
Finally, the term real estate may be used when referring to the industry or business activities
related to the acquisition, operation, and disposition of the physical assets.
Real Estate: A Tangible Asset;

When viewed purely as a tangible asset, real estate can be defined as the land and its
permanent improvements. Improvements on the land include any fixed structures such
as buildings, fences, walls, and decks. Improvements to the land include the components
necessary to make the land suitable for building construction or other uses.










Real Estate: A Bundle of Rights
Although real estate is a tangible asset, it can also be viewed as a “bundle” of intangible
rights associated with the ownership and use of the site and improvements. These rights are
to the services, or benefits, that real estate provides its users. For example, real property
provides owners with the rights to shelter, security, and privacy, as well as a location that
facilitates business or residential activities. This concept of real property as a bundle of
rights is extremely important to understanding real estate, and is the subject of Chapter 2.
The bundle of property rights may be limited in numerous ways. It typically is reduced
by land use restrictions (see Chapter 4). Also, the rights can be divided and distributed
among multiple owners and nonowners. For example, an apartment owner divides his full
interest in the property when he leases an apartment unit and grants to a tenant the right to
occupy and control access to the unit. Similarly, the tenant may divide his interests by subleasing
the apartment to another. As another example, an owner may purchase a property
that has a utility access granted through a portion of the property. Thus, real estate can also
be viewed as a bundle of rights inherent in the ownership of real property.
The value of a bundle of rights is a function of the property’s physical, locational,
and legal characteristics. The physical characteristics include the age, size, design, and
construction quality of the structure, as well as the size, shape, and other natural features
of the land. For residential property, the locational characteristics include convenience
and access to places of employment, schools, shopping, health care facilities, and other
places important to households. The location characteristics of commercial properties may
involve visibility, access to customers, suppliers, and employees, or the availability of
reliable data and communications infrastructure. The physical and location characteristics
required to provide valuable real estate services vary significantly by property type.