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What is Real Estate & How Does it Work?

Modified date: January 25, 2024

The term, Real Estate simply means real/physical properties, which are land, buildings, underground rights below the land and air rights above the land.

The word “Real” comes from the Latin root rex, meaning “royal,” since kings, in those days, owned all land in their kingdoms. Also, at first; according to the U.S. Constitution, voting rights were limited to only real estate owners.

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TYPES OF REAL ESTATE

There are four types of Real estate and we have listed them below with their respective descriptions.

1. RESIDENTIAL REAL ESTATE

Real estate involves both new buildings and resale houses. Single family houses are the norm but it also includes condominiums, co-ops, duplexes, triple-deckers, quadplexes, townhouses, high-value houses, multi-generational and vacation houses.

2. LAND REAL ESTATE

Land real estate involves vacant land, working farms, and ranches. Subcategory inside vacant land include undeveloped, pre development or reuse, subdivision and site assembly.

3. COMMERCIAL REAL ESTATE

Commercial real estate has to do with shopping centers and strip malls, medical and educational buildings, hotels and offices. Apartment buildings, sometimes, are regarded commercial, although they are used for habitation. That’s due to the fact that they are owned to generate income.

4. INDUSTRIAL REAL ESTATE

real estate includes production buildings, property, and also warehouses. The buildings can be used in researching, manufacturing, storage, and distribution of goods. Some buildings used in distributing goods can be considered COMMERCIAL real estate. The classification is essential since the zoning, construction, and sales are handled distinctly..

The Real Estate Industry: How does it work?

Real estate industry involves producing, buying and selling real estate. Hope you know that real estate influences the U.S. economy by being an important propeller of its economic growth?

New Building Constructions

Construction of new buildings is a component of GDP. And that includes both residential, commercial, and industrial buildings. In 2018, real estate construction added $1.15 trillion to the nation’s economic production; making it 6.2% of U.S. GDP , more than the $1.13 trillion in 2017 but still less than the 2006 peak of $1.19 trillion. At that time, real estate construction made a bulky 8.9% component of GDP.

Home Building

Construction of new homes is an important category involving building single-family houses, townhouses, and condos. The National Association of Home Builders showcases monthly reports on home sales and average prices. The reports on new home sales is a leading economic indicator as it takes about four months to set up a trend for new houses sold..

Real Estate Agents

Real estate agents help house owners, businesses and investors buy and sell all four types of real estate properties. The industry is normally categorized into specialists that is involved in each type of real estate property.

Seller’s Agent

Using Multiple Listing Service or through their professional contacts, agents of sellers help them find buyers. They set up a price for your property, by comparing lists of newly sold out properties also known as “comps.” They can help in tidying up your property so it looks great to buyers. They also help out in negotiations with the intended buyer, so you will obtain the highest price possible.

Buyers’ Agents

Buyers’ agents offer similar services to the home buyer. Since they are familiar with the local market, they can obtain a property that is ideal for you. They also do comps (compare prices) to enable them to direct you to places that are affordable. Buyers’ agents negotiate with the seller to accept a cheaper price. They assist with the legalities of the process, including title search, inspection and financing.

Real estate agents desiring to advance their professionalism become REALTORS®. The National Association of REALTORS® gives out reports on the number of homes resold and their average price on a monthly basis. This is a better indicator of the state of the entire housing industry than new home construction ,due to new home builders who can be over excited about future sales and overbuild and can also reduce prices to force sales. NAR provides the current housing market statistic and individual homeowners must abide by the market’s supply and demand range. They don’t have the influence to manipulate the market.

Real Estate Investment

Anyone who buys or sells a home engages in real estate investing. Real estate investors must consider several factors. If the house tops value as you’re living in it ? How will future interest rates and taxes affect you whenever you get a mortgage?

A lot of people are doing great with real estate investing as they buy and sell homes as a business. There are quite a number of ways to do that. Firstly, by flipping. This means buying a house to improve then selling it. A lot of persons own several houses and rent them out. Some people use Airbnb as a easy way to rent out all or part of their homes. You can also rent vacation homes using VRBO or Home Away.

Before you do so, ensure to know where we are in the current business cycle. You wouldn’t want to risk investing when the real estate market is going to crash.

One great thing is that you can also invest in housing without buying a home by simply buying stocks of homebuilders. Their stock prices rise and fall alongside the housing market. Another great way is with Real Estate Investment Trusts, called REITs. There are investments in commercial real estate and their stock prices lag behind trends in residential real estate with a few years.

What Should New Home Statistics Inform You Concerning the Real Estate Market?

Statistics concerning new home construction are critical leading economic indicators. This means they will give you a possible idea on the future of the housing market.

The chart below illustrates the figures of new privately owned housing units started between 2000 and 2019.

From each of these indicators, it narrates a quite different story regarding the health of the homebuilding industry. Let’s say , home starts become stable, but housing starts declining ,that will take a toll on home sales. A lot of buyers won’t want to wait longer than one year. And it means there’s a scarcity of lumber, concrete, and construction workers. These lack can increase costs as well as selling price and will reduce demand for new homes.

If mortgages are moving downhill; homebuilder will eventually have an index of unsold homes for sale, which makes demand to increase, although homeowners can’t acquire mortgages. Although rising home starts might seem like an indicator of housing strength, it might also be a bad sign. Declining home closings means the housing market is weak.

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Selling a new home is the first step in a 9-12 month process. If the sales picks up, closings will be due in a year. Nevertheless, all remaining three steps must be completed.

A new home sale happens whenever the buyer signs the paperwork and gives the homebuilder a deposit. Owing to most new homes are not built until there is a person to buy it. However, they are exceptions like spec homes which are used as model homes.

Two months after doing all paperwork, the local housing regulators will grant the permi, which is an early indicator, but not always accurate. Builders could go bankrupt and never build the permitted units. They can also change the number of units built in a multi-family. As a matter of fact, 22.5% of multi-family permits weren’t built, or are changed to single-family units. Eventually, developers frequently receive permits for a huge part of a complex that could taken them several months to build.

Once the builder breaks ground, new home start comes next. The NAHB reports on this every month. It is highly accurate since the new home start only happens whenever the builder is self-assured enough to break ground.

The closing should occurs around six to nine months later.The homebuyer must receive a mortgage before the home can close. And if he/she doesn’t qualify, the house remains in inventory. If the estimates are less than the home sale figures, the new home market will start to slow down. There are too many homes being built, and not enough qualified home buyers. It can also mean builders will begin lowering prices to clear their inventories.

These are three other important indicator you should consider.

Inventory: This is the collective number of homes that are available for sale, but are not sold. The NAHB gives reports concerning this on a monthly basis.

Sales Prices: A report from The Census Bureau details the average selling price as well as the median of a new home.

Months of Supply: It entails the number of months it would take to sell all the houses in inventory based on the sales rate and inventory. The NAHB also gives these reports monthly.

What is Real Estate & How Does it Work?