Real Estate

Introduction

Real estate economics is the study of the markets for land and structures, including residential housing, commercial office space, and industrial warehouses. Although much theory has existed for decades regarding real estate markets, questions are being answered today regarding mortgage finance innovation, the rise of suburban business and residential centers, and the effects of zoning laws (Worzala, 89-97). The housing boom and bust of the first decade of the twenty-first century has meant that households, businesses, and governments have become more interested than ever in real estate and its effect on various aspects of the economy. In this paper, the theory of real estate markets is first presented, including the relevance of real estate rental price, the importance of location, and the interaction with the macro economy. Finally, the housing boom and bust is presented along with areas for future research.

Theory of Real Estate Markets

Flow of Services, Rent, and Price

In many respects, real estate markets are similar to markets for other goods and services. There exist buyers who demand real estate by demonstrating a willingness and ability to pay for property. There are also sellers who supply real estate. One unique feature of real estate is that the goods in question—namely, land and structures—are long-lived. Consuming real estate does not result in the disappearance of the good as with, say, consuming a slice of pizza. Real estate can be purchased and enjoyed today and then sold again tomorrow. In fact, the vast majority of real estate sold in any year was previously owned. Because of this durability, the decision to buy or sell real estate must take a long time horizon into account (Voicu, 241-283).

Durable goods deliver a flow of services over time to the owner or user of that good. For example, a car lasts many years, and a car will deliver a flow of transportation services each year. Real estate delivers a flow of shelter services, in residential housing, and a flow of retail store space, in commercial real estate. The person who purchases a durable good takes current and all future flows of services into account when making the decision to purchase the good. This is true whether or not the buyer intends to use the services that flow from the durable good. For example, in the case of a car, although often the buyer intends to drive the car for a number of years after the purchase, car rental companies purchase large amounts of cars in order to charge rent to their customers. The same is true in real estate, where a large amount is owner occupied, while other people intend primarily to offer for rent the shelter or retail space to others. If the buyer intends to rent the real estate to others, then the buyer's willingness to pay will be based on the rent that can be earned, which is determined by renters and landlords in the rental market for real estate. Renters will be willing to pay rent that is at or below ...