Economics of Real Estate
Did you know that an average American household spends about 26% of their total annual earnings on housing costs? This number varies across the world, but the fact remains that almost all of us spend most of our earnings on housing. Did you ever wonder what happened to this money? How does it flow through our community and country? This documentary explores the different stakeholders in this industry, aiming to educate our viewers on how this sector contributes to the global economy.
Real estate is one of the most important sectors of the economy, as it affects the wealth, income, and well-being of individuals, businesses, and governments. Real estate transactions involve the exchange of money between different agents in society, such as buyers, sellers, lenders, brokers, developers, and regulators. These money flows have various impacts on the allocation of resources, the distribution of income, and the provision of public goods and services.
One of the main money flows in real estate is the payment of property taxes by owners to local governments. Property taxes are based on the assessed value of real estate properties, which reflects their market value and characteristics. Property taxes are a major source of revenue for local governments, as they account for about 30% of their general fund revenues in the US1. Property taxes are used to fund various public services and infrastructure that benefit the residents and businesses in the local area, such as schools, roads, parks, libraries, police, fire, and sanitation. Property taxes also affect the demand and supply of real estate, as they influence the affordability and profitability of owning and developing properties.
Another money flow in real estate is the payment of mortgage interest by borrowers to lenders. Mortgage interest is the cost of borrowing money to finance the purchase or improvement of real estate properties. Mortgage interest rates are determined by various factors, such as the creditworthiness of borrowers, the availability and cost of funds in the financial market, the risk and return of alternative investments, and the monetary policy of the central bank. Mortgage interest rates affect the demand and supply of real estate, as they influence the borrowing capacity and incentive of buyers and developers.
A third money flow in real estate is the payment of commissions by sellers to brokers. Commissions are fees charged by brokers for facilitating real estate transactions between buyers and sellers. Commissions are usually a percentage of the sale price of properties, ranging from 4% to 6% in the US2. Commissions are a source of income for brokers, who provide various services to buyers and sellers, such as marketing, negotiation, valuation, inspection, appraisal, and closing. Commissions also affect the demand and supply of real estate, as they influence the transaction costs and net proceeds of selling properties.
These are some examples of how money flows through society from buyers to governments to fund schools and buses in real estate economics. Real estate economics is a branch of economics that applies economic techniques to real estate markets3. It tries to describe, explain, and predict patterns of prices, supply, and demand in real estate4. It can also help real estate agents, investors, professionals, and policymakers with analysis and decisions5. Real estate economics covers residential and commercial real estate, as well as urban and spatial economics6. Real estate investing is a more specific field that focuses on smaller residential properties.