Real estate contributes much to the overall wealth of the United States and is one of the major investment asset classes. Analysis of the elements of Gross Domestic Product of the United States indicates that real estate industry accounts for about twenty percent of the economic output. The commercial real estate constitutes about six percent of the GDP. Land is a treasured asset that people should learn to preserve and to use efficiently. Real estate has numerous exceptional characteristics that make it dissimilar from other kinds of products.However according to Galaty&Allaway (2002), characteristics of real estate can be divided into Physical, Economic and social aspects which are normally viewed in form of the interdependence between land and culture of the persons within a geographic settings. This paper therefore illustrates the ways in which the unique economic characteristics of real estate impact modern real estate transactions in the US
Real estate has numerousexceptional characteristics that influences modern real estate transactions. These comprises both the economic and physical ones. The economic characteristics that affects real estate transactions are scarcity, improvements, permanence and area preference. Scarcity in matters of land and real estate is normally illustrated in the saying, “They are not making any more.” The stock of land has an upper limit and cannot be produced more than what exists currently. Even though some lands can be acquired at very low prices, land for particular uses in particular areas is often inadequate to meet the demand. As the population in the United States keeps increasing, the scarcity of land for food production might arise, resulting in shortages of real estate development space(Cortesi, 2004). This and other elements causes an increase in the demand for land with decreasing supply in the urban regions. The significance of this characteristic is that a great demand in an area is likely to increase the property values. The landowner of property in a highly desired area usually has an almost monopolistic advantage(Galaty&Allaway, 2002).
Another significant economic characteristic is known as Fixed Investment also referred to as permanence. Most adjustments or enhancements to land/real estate cannot be moved and may take over ten years to reimburse the investment. Therefore, investments in real estate is normally long lasting. Constructions and related facilities, once fitted becomes part of the real estate. This characteristic makes the value of a real estate investment extremely reliant on the economic changes in a particular place or on changes in individuals’ likings. The property enhancements relies on the locality in which the land is located. Thus before obtaining or refining land, an investor should consider how long the value of a particular land will last. This characteristic in most cases has to do with the infrastructure (Cortesi, 2004). As buildings, residential houses or other forms of structures are destroyed, the infrastructure, like sewer lines, drainages, electricity, and water pipelines remain intact. In the United States,ifan individual purchases a piece of land in a locality with no utilities, drainage or cemented streets, it is most likely be worth less than a piece of land that has this infrastructure intact and well developed. Fixed investment therefore implies that investments in real estate are long term. This is mainly as a result of physical characteristics of immobility and indestructibility. Since land is not movable, investment in property becomes fixed. Thus cannot be moved if the market becomes more favorable somewhere else. Also for the reason that real estate transactions are complex and involve huge amounts of money, they are not made as frequently as other transactions and requires more time to consummate (Cortesi, 2004). If a bigcorporation builds in a certain poorcommunity, the value of living within the areais likely to increase as a result of the introduction of employment opportunity. This value has been seen to impact on neighboring communities in the United States, thus increasing value in some ways to the real estate in such areas.
Anotherimportant economic characteristic of land/ real estate in the U.S, is its ability to be reformed or improved with the related impact on the value. Enhancements on the land may include new buildings, fences or other significant things that then become part of the real estate. Enhancements to land also include access road and rail network, nearby educational facilities, construction of frivolous facilities and industries among other elements that make real estate more valued without changing the site itself(Ball& Wiley InterScience, 2006). Land in its natural state without any form of development is known as virgin or raw land. Real estate that has had its value improved by development is referred to as improved land. Developments on one parcel of land may have a great impact on the value of the neighboring parcels or the wholeregion.
Area preference is another important economic characteristic. It refers to the choice of aperson in any given area. This is normally referred to by most individuals when talking about real estate as, “location, location, location.” The location of anideal area, for whatever motives, is what makes values of houses higher. On the contrary, the location of anarea that is not preferred for whatever motive, is what makes the values of houses less(Ball& Wiley InterScience, 2006). 8000 square foot newly developed homes on the coast of Long Island’s, East Hampton is likely to be worth much more as a result of their area preference, over an area with 1200 square foot new homes in the middle of Long Island, situatednear a compost site. Locality as it relates to hot real estate markets, as well as, location within a region has the most impact. One can purchase a house for $500,000 in an urban area that may sell for $180, 00 (or less) in a less populated region. Neighborhoods influences pricing for the same reasons mentioned above. Real estate is one of the steadiest investments if well planned, especially if one is in it long term. If planning to buy properties for renting purposes, one should consider newer areas and renting to young families or smaller communities and renting to seniors. Again location and having knowledge of what is going on in the region economically is significant (Ball& Wiley InterScience, 2006). Detroit is a good case of what was a good definition of working class region till the automakers turned into becoming more automated and a majority of the secondary suppliers to the automakers singled out. The region was and still is devastated by the changes. Similar portions of real property may have very dissimilar values just because of the dissimilarity in location(Cortesi, 2004). The dissimilarity can be caused by individuals’ preference for natural attributes like climatic conditions, soil, and scenery or for human-made factors such as schools, cultural attractions among other factors. Both affect the worth of the land and thus the value. Changing situations like population shift or industrial developments often cause some land to increase significantly in value and other lands to depreciate in value.
The key economic characteristics that affects real estate transactions as discussed in the paper include scarcity, improvements, permanence and area preference. Therefore, when looking for real estate investment, it is significant to consider the infrastructure of a region, the immediate neighborhood as well as the preferences of a place. This will guarantee long term value of the real estate.
Cortesi, G. R. (2004). Mastering real estate principles. Chicago: Dearborn Real Estate Education.
Galaty, F. W., Allaway, W. J., & Kyle, R. C. (2002). Modern real estate practice. Chicago, IL: Dearborn Real Estate Education.
Ball, M., & Wiley InterScience (Online service). (2006). Markets & institutions in real estate & construction. Oxford: Blackwell Pub.