Demand for housing

The main determinants of the demand for housing are demographic. However other factors like income, price of housing, cost and availability of credit, consumer preferences, investor preferences, price of substitutes and price of compliments all play a role.

The core demographic variables are population size and population growth: the more people in the economy, the greater the demand for housing. But this is an oversimplification. It is necessary to consider family size, the age composition of the family, the number of first and second children, net migration (immigration minus emigration), non-family household formation, the number of double family households, death rates, divorce rates, and marriages. In housing economics, the elemental unit of analysis is not the individual as it is in standard partial equilibrium models. Rather, it is households that demand housing services: typically one household per house. The size and demographic composition of households is variable and not entirely exogenous. It is endogenous to the housing market in the sense that as the price of housing services increase, household size will tend also to increase.

Income is also an important determinant. Empirical measures of the income elasticity of demand in North America range from 0.5 to 0.9 (De Leeuw, F. 1971). If permanent income elasticity is measured, the results are a little higher (Kain and Quigley 1975) because transitory income varies from year-to-year and across individuals so positive transitory income will tend to cancel out negative transitory income. Many housing economists use permanent income rather than annual income because of the high cost of purchasing real estate. For many people, real estate will be the most costly item they will ever buy.

The price of housing is also an important factor. The price elasticity of the demand for housing services in North America is estimated as negative 0.7 by Polinsky and Ellwood (1979), and as negative 0.9 by Maisel, Burnham, and Austin (1971).

An individual household’s housing demand can be modeled with standard utility/choice theory. A utility function, such as U=U(X1,X2,X3,X4,...Xn), can be constructed in which the households utility is a function of various goods and services (Xs). This will be subject to a budget constraint such as P1X1+P2X2+...PnXn=Y, where Y is the households available income and the Ps are the prices for the various goods and services. The equality indicates that the money spent on all the goods and services must be equal to the available income. Because this is unrealistic, the model must be adjusted to allow for borrowing and/or saving. A measure of wealth, lifetime income, or permanent income is required. The model must also be adjusted to account for the heterogeneousness of real estate. This can be done by deconstructing the utility function. If housing services (X4) is separated into the components that comprise it (Z1,Z2,Z3,Z4,...Zn), then the utility function can be rewritten as U=U(X1,X2,X3,(Z1,Z2,Z3,Z4,...Zn)...Xn) By varying the price of housing services (X4) and solving for points of optimal utility, that household's demand schedule for housing services can be constructed. Market demand is calculated by summing all individual household demands.

Overview of real estate markets

• Owner/User - These people are both owners and tenants. They purchase houses or commercial property as an investment and also to live in or utilize as a business.
• Owner - These people are pure investors. They do not consume the real estate that they purchase. Typically they rent out or lease the property to someone else.
• Renter - These people are pure consumers.
• Developers - These people prepare raw land for building which results in new product for the market.
• Renovators - These people supply refurbished buildings to the market.
• Facilitators - This includes banks, real estate brokers, lawyers, and others that facilitate the purchase and sale of real estate.

The owner/user, owner, and renter comprise the demand side of the market, while the developers and renovators comprise the supply side. In order to apply simple supply and demand analysis to real estate markets a number of modifications need to be made to standard microeconomic assumptions and procedures. In particular, the unique characteristics of the real estate market must be accommodated. These characteristics include:

• Durability - Real estate is durable. A building can last for decades or even centuries, and the land underneath it is practically indestructible. Because of this, real estate markets are modeled as a stock/flow market. About 98% of supply consists of the stock of existing 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 deterioration 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 piece 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 asymmetry and greatly restricts substitutability. To get around 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 that it provides. Olsen (1969) describes these units of housing services as an unobservable theoretical construct. Housing stock depreciates making it qualitatively different from a new building. The market equilibrating process operates across multiple quality levels. Further, the real estate market is typically divided into residential, commercial, and industrial segments. It can also be further divided into subcategories like recreational, income generating, area, historical/protected, etc.
• High Transaction costs - Buying and/or moving into a home costs much more than most types of transactions. These costs include search costs, real estate fees, moving costs, legal fees, land transfer taxes, and deed registration fees. Transaction costs for the seller typically range between 1.5 - 6% of the purchase price. In some countries in Continental Europe, transaction costs for both buyer and seller can range between 15 - 20%.
• Long time delays - The market adjustment process is subject to time delays due to the length of time it takes to finance, design, and construct new supply, and also due to the relatively slow rate of change of demand. Because of these lags there is a great potential for disequilibrium in the short run. Adjustment mechanisms tend to be slow, relative to more fluid markets.
• Both an investment good and a consumption good - Real estate can be purchased with the expectation of attaining a return (an investment good), or with the intention of using it (a consumption good), or both. These functions can be separated (with market participants concentrating on one or the other function) or can be combined (in the case of the person that lives in a house that they own). This dual nature of the good means that it is not uncommon for people to over-invest in real estate, that is, to invest more money in an asset than it is worth on the open market.
• Immobility - Real estate is locationally immobile (save for mobile homes, but the land underneath them is still immobile). Consumers come to the good rather than the good going to the consumer. Because of this, there can be no physical market-place. This spatial fixity means that market adjustment must occur by people moving to dwelling units, rather than the movement of the goods. For example, if tastes change and more people demand suburban houses, people must find housing in the suburbs, because it is impossible to bring their existing house and lot to the suburb (even a mobile home owner, who could move the house, must still find a new lot). Spatial fixity combined with the close proximity of housing units in urban areas suggest the potential for externalities inherent in a given location.

Real estate economics

Real estate economics is the application of economic techniques to real estate markets. It tries to describe, explain, and predict patterns of prices, supply, and demand. The closely related fields of housing economics is narrower in scope, concentrating 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 (supply and demand), urban economics, spatial economics, extensive research, surveys and finance.

Fees

Lettings

Estate agents who handle lettings of commercial property normally charge between 7–10% of the first years rent as fees, this is in addition to taking the first month's rent in its entirety. This will be the total fee. If, say, two agents are charging 10%, they split this between them. Estate agents selling commercial property (known as investment agents) typical charge 1% of the sale price.

The fees charged by residential Letting Agents are extremely variable, depending on whether the agent manages the property or simply arranges new tenants. Charges to prospective tenants can vary from zero to £300 in non-refundable fees usually described as "Application", "Administration" or "Processing" fees (or all three). There are no guidelines for letting agents on charges except that they are forbidden by law to charge a fee for seeing a list of properties; otherwise, they are free to charge as they please.

The first month's rent in advance plus a refundable bond (usually equal to a month's rent) is also generally required. Most residential lettings in the UK are effected through a particular form of contract known as an "assured shorthold tenancy". Assured Shorthold tenancies (generally referred to simply as "Shorthold") give less statutory protection in terms of security of tenure than earlier, mostly obsolete, types of residential lettings. Shorthold Tenancy agreements are standard contracts generally available from legal stationers and the internet for around £1, the average lettings agent will charge £30 to provide such a contract.

Selling

Estate agents selling residential property generally charge between 1/2% to 4% of the sales price plus VAT, depending on the contractual arrangement and whether an individual firm has sole rights to the sale.

Other approaches

Since around 2000, online estate agents have provided an alternative to the traditional fee structure, claiming cheaper, fixed fee selling packages. These online estate agents claim to give private property sellers the ability to market their property via the major property portals (the preferred medium used by traditional high street estate agents) for a fraction of the cost of traditional estate agency.

New types of property portals based in the United Kingdom have started to encourage UK and worldwide estate agents to collaborate by showing all their properties, thus allowing site visitors to see a vast array of UK and overseas properties all on one website.

Many estate agents are using the latest technology to assist in the sale of houses, with companies enabling home buyers to receive property details while outside a house using a mobile phone.

Estate agent

Estate Agent is a British English term for a person or business that arranges the selling, renting or management of homes, land and other buildings, although an agent that specialises in renting is often called a Letting Agent. Estate agents are mainly engaged in the marketing of property available for sale and a Solicitor or Licensed Conveyancer is used to prepare the legal documents. In Scotland, however, many solicitors also act as estate agents, a practice that is rare in England and Wales.

The term originally referred to a person responsible for managing a landed estate, while those engaged in the buying and selling of homes were "house agents", and those selling land were "land agents". However, sometime during the 20th century "estate agent" started to be used as a generic term, perhaps because it was thought to sound more impressive. Estate agent is roughly synonymous in the United States with the term real estate broker.

Real Property

In the common law, real property (or realty) refers to one of the two main classes of property, the other class being personal property (personalty). Real property generally encompasses land, land improvements resulting from human effort including buildings and machinery sited on land, and various property rights over the preceding.

The concept is variously named and defined in other jurisdictions: heritable property in Scotland, immobilier in France, and immovable property in Canada, United States, India, Pakistan, Bangladesh, Malta, Cyprus, and in countries where Civil law (legal system)civil law systems prevail, including most of Europe, Russia, and South America.

Real Estate Broker

A real estate broker is a term in the United States and Canada which describes a party who acts as an intermediary between sellers and buyers of real estate (or real property as it is known elsewhere) and attempts to find sellers who wish to sell and buyers who wish to buy. In the United States, the relationship was originally established by reference to the English common law of agency with the broker having a fiduciary relationship with his clients.

Estate agent is the term used in the United Kingdom to describe a person or organization whose business is to market real estate on behalf of clients, but there are significant differences between the actions and liabilities of brokers and estate agents in each country. Beyond the US, other countries take markedly different approaches to the marketing and selling of real property.

In the US, real estate brokers and their salespersons (commonly called "real estate agents" or, in some states, "brokers") assist sellers in marketing their property and selling it for the highest possible price under the best terms. When acting as a Buyer's agent with a signed agreement (or, in many cases, verbal agreement, although a broker may not be legally entitled to his commission unless the agreement is in writing), they assist buyers by helping them purchase property for the lowest possible price under the best terms. Without a signed agreement, brokers may assist buyers in the acquisition of property but still represent the seller and the seller's interests.

In most jurisdictions in the United States, a person is required to have a license in order to receive remuneration for services rendered as a real estate broker. Unlicensed activity is illegal, but buyers and sellers acting as principals in the sale or purchase of real estate are not required to be licensed. In some states, lawyers are allowed to handle real estate sales for compensation without being licensed as brokers or agents.

Mortgages in real estate

In recent years, many economists have recognized that the lack of effective real estate laws can be a significant barrier to investment in many developing countries. In most societies, rich or poor, a significant fraction of the total wealth is in the form of land and buildings.

In most advanced economies, the main source of capital used by individuals and small companies to purchase and improve land and buildings is mortgage loans (or other instruments). These are loans for which the real property itself constitutes collateral. Banks are willing to make such loans at favorable rates in large part because, if the borrower does not make payments, the lender can foreclose by filing a court action which allows them take back the property and sell it to get their money back. For investors, profitability can be enhanced by using an off plan or pre-construction strategy to purchase at a lower price which is often the case in the pre-construction phase of development.

But in many developing countries there is no effective means by which a lender could foreclose, so the mortgage loan industry, as such, either does not exist at all or is only available to members of privileged social classes.

Real estate in Mexico and Central America

The real estate business in Mexico and Central America is different from the way that it is conducted in the United States.

Some similarities include a variety of legal formalities (with professionals such as real estate agents generally employed to assist the buyer); taxes need to be paid (but typically less than those in U.S.); legal paperwork will ensure title; and a neutral party such as a title company will handle documentation and monies in order to smoothly make the exchange between the parties. Increasingly, U.S. title companies are doing work for U.S. buyers in Mexico and Central America.

Prices are often much cheaper than most areas of the U.S., but in many locations prices of houses and lots are as expensive as the U.S., one example being Mexico City. U.S. banks have begun to give home loans for properties in Mexico, but, so far, not for other Latin American countries.

One important difference from the United States is that each country has rules regarding where foreigners can buy. For example, in Mexico, foreigners cannot buy land or homes within 50km of the coast or 100km from a border, while, in Honduras, they may buy beach front property. There are also different special rules regarding certain types of property: ejidos — communally held farm property — cannot be sold to anyone, but that does not prevent them from being offered for sale.

Many websites advertising and selling Mexican and Central American real estate exist, but they may need to be researched.

In Costa Rica, real estate agents do not need a license to operate, but the transfer of property requires a lawyer.

Real Estate

Real estate is a legal term (in some jurisdictions, notably in the USA, United Kingdom, Canada, and Australia) that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is stationary, or fixed in location.[1] Real estate law is the body of regulations and legal codes which pertain to such matters under a particular jurisdiction. Real estate is often considered synonymous with real property (also sometimes called realty), in contrast with personal property (also sometimes called chattel or personalty under chattel law or personal property law).

However, in some situations the term "real estate" refers to the land and fixtures together, as distinguished from "real property," referring to ownership rights of the land itself.[clarify]

The terms real estate and real property are used primarily in common law, while civil law jurisdictions refer instead to immovable property.