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Real Estate Economics

Real Estate is, by definition, the land and everything that is a part of it and the extent of one’s interest in it. The word real in real estate stands for the fact that it is land and different than personal property. It is real property, property that is more or less immobile. The word estate in real estate stands for the interest that one has in the property. This definitions shows that real estate is a different sort of property. It is property that may be legally yours but it is still not your personal property. Real Estate is land and property that can be acquired, owned or transferred by both individuals and business.

There are rules and regulations to follow when performing any one of those actions. These rules and regulations become very important when discussing the balance in real estate. But what is real estate? Real estate is the process of purchasing real property and the problems and steps that one must follow through with. Elements of Real Estate I. Home When buying a new house there are many things that must be solved before the deed can be signed to the proud new owner. Page 2 Very few people have the financial means of making a one-time full payment on a home. The price of living has ncreased and so has the prices for homes.

For many, the only outlet to buy the house of their dreams is to go and find a mortgage to finance their home. The first thing the prospective homeowner does is go to his bank and try to find a loan that is large enough and has the right interest rate that he can use to buy a house that he wants and can afford. In order to get the loan the future owner must establish credit. He will be asked about income, employment history and credit history. All of these variables allow the bank to determining whether or not this person will ever fully pay for the mortgage.

Once the loanee has established credit for the loan the amount of money paid on each payment and the amount of time allowed to pay the payment is determined by the bank and must be agreed to buy the loanee. Most of the time it is a monthly payment and is between 15 to 35 years. The mortgage is made of two parts. There is the interest and there is the principal. The principal is the amount of the loan still owed and the interest is the fee that the bank sets in order for its money to be used. The interest is often the only variable in mortgages and signals the difference in the two main kind of mortgages.

The fixed-rate mortgage and the adjustable-rate mortgage. With fixed-rate mortgage the Page 3 interest rate stays the same over the life of the loan. With an adjustable-rate mortgage, the interest rate can change at the end of pre-determined intervals. The interest rate is based on the published index on the current interest rates. The effects of raised interest rates are most felt in this type of mortgage. Before the mortgages final and its terms become legal, the loanee must sing a promissory note that obligates them to pay for the mortgage debt.

During the time that the loanee is paying for the mortgage nd thus, still paying for the house, he must promise to keep the property insure against fire and other hazards. He must also promise to pay for any of the property taxes. When the mortgage is done and fully paid for, the ownership belongs fully to the loanee. However, if the owner fails to pay the mortgage payment or misses a payment there is a late fee and the interest percentage of the house may rise or the loan may be foreclosed.. If the owner just totally can no longer afford to make the payments the bank will seize the house and it will be sold to satisfy the bank.

The would-be owner will ose the house and will lose any equity that has built up in it. In times of unemployment, the foreclosure rate rises. Foreclosure is usually a last resort for the bank and very often if the loan becomes to hefty a price to pay, the mortgage will be reopened and the loan payment schedule may Page 4 be reworked to give the loanee a better chance to pay off the loan. II. Condominium The condominium concept of ownership was introduced in the United States in 1961. The Condominium concept entails that there is separate ownership of individual apartments or units in a multi-unit building.

The purchaser of the condominium becomes the owner of a particular unit and a proportionate share in the common elements and facilities. When purchasing the condominium it may be mortgaged. After purchase the owner is required to pay the taxes and a fixed monthly sum to maintain the common elements. III. Cooperative Ownership Cooperative Ownership seems very similar to the condominium concept but it is, in fact, quite different. In Cooperative ownership, the legal owner of the whole building is a corporation.

The purchaser of an apartment in the corporate-owned building is actually buying stock in the orporation. Not only does the purchaser get a stock certificate. bit he also receives a permanent or temporary deed of the apartment. The corporation owns all the units and common areas. When paying the cost, it covers their share of the single mortgage for the entire building, real estate taxes, insurance, and the service and maintenance Page 5 required by the common areas. When a cooperative unit is sold, the seller surrenders his stock and deed back to the corporation.

There are many laws and regulations that differ between states on the form and structure of cooperative ownership. IV. Commercial Commercial Real Estate is real property owned by a business venture like cooperative ownership, but it shares more of the same aspects as Home Real Estate. The only real major differences between Home and Commercial real estate is that in commercial real estate the property may be financed differently and they may receive certain tax breaks. Just recently, companies have found easier ways of financing their real estate.

In lieu of cash payment, companies may be giving out company stock options to the bank. The recent boom of Silicon Valley is a very good example of this idea. Silicon Valley has harbored the new technological wave of industry and the home to many startup Internet and technological companies. Because many of these companies start with only an idea and no money, giving away company stock is the only feasible alternative. For the banks it can have it’s good and bad sides. If the company bankrupts, the bank will lose valuable worth because of unusable stock.

But if the company succeeds then the bank could potentially have a very valuable and profitable investment. It is a hit Page 6 or miss situation. It is risky but then again so is any investment. Commercial Real estate also includes the new variable of taxes more up front. Very often cities will grant business tax breaks if they promise to build an office of factory in their town. When cities have valuable industry it brings jobs and wealth to the city. Everybody benefits because the city is being kept employed and the company has workers to work.

Because this mutual relationship is more of a great benefit to the city, the city will try to give lucrative incentives to court commercial business. Economics of Real Estate The economics of real estate basically include how real roperty is acquired and it’s affects on the economy. The process between the sellers and buyers in the industry is what the economics of real estate really is. It is a cycle of business. Between the customers, banks, sellers, and federal interest rates, there are so many different sorts of information to gather in order to fully discuss this idea.

The cycle of new building and the tearing down of old homes show how everything is a renewing cycle. The old buildings must be teared down to make room for more profitable real estate. Real estate is not only a revenue producer but also a way for people to start a true home. Page 7 I. Interest Rates The economics of real estate are very complicated that has many different variables that can affect it. The one variable that puts the most stress on economics is the interest rates. Depending on the mortgage, the interests rates set by the Feds can have serious affects on peoples abilities to pay off the loan.

When interest rates are raised it makes it more difficult for people to pay off the loans because it raises the price of the each loan payment. That is why the recent hikes in the interest rates have affected the stability of the real estate industry. The nterest rate hikes are in response to the super fast growth of the stock market. The stock market was out of control and it was also causing the economy to grow to fast for it’s own good. When the economy grows to fast, the risk of inflation rises and can cause our money to be worth less.

By raising the interest rates people have had to pay more on their loans and thus have had less money to spend and it can be seen in how the stock market has dropped. There is less money to go around and is instead going to the banks. II. Loans These loans have a great affect on the economy. The loans iven out by banks keep our nations banking system running. When banks give out loans they expect to make money in the end. Because there is an interest fee put on all loans, at Page 8 the end of the loan schedule the bank will have made money. Only banks have the sort of money to give as loans.

They are counting on the ability of the people to pay back the loan. The banks use the money from customers deposits and transfer those funds into money that they can loan out. This whole system of borrowing is very good and beneficial for both parties. The bank makes money off the loan customer and can use the profit to fund more profitable oans. The loan customer is given the money that he will make in the future to pay for something that he needs now. In reality, when the loan customer signs the mortgage they are also mortgaging their future.

When signing the contract the customer must realize that this contract states that for many, many years, they must continue to make every payment everytime. They have to have the faith that they will continue to make money and pay back the loan. The banks must trust the customer that they will get paid back and the customer must trust themselves that they will make all payments. III. Unemployment The unemployment rate in the nation can signal serious problems in the economy. When the unemployment rate rise so does the foreclosure rate in real estate.

When unemployment rises it lowers the peoples abilities to pay back their loan. If during that time period, unemployment is a serious Page 9 problem it can wreak havoc on the nations banking system. The banks only survive because people have to make their payments. If banks cannot receive the money back from their loans, they fail. So if banks fail to collect loans, they will go under and ruin the stability of the country. IV. Real Estate Tax Real estate tax is a tax levied upon real property. In the United states, the real estate tax has been the chief method of collecting local revenue.

It accounts for more that 25 percent of all state and local government receipts. The tax may be assessed on the sale value of the property, although a better method would be on the classification of the land according to its productiveness. The effects of the real estate tax greatly affect the economy. By being such a good revenue producers it gives a valuable source of tax dollars. By becoming the primary source of tax money, it is the most mportant tax in keeping our nation going. The tax dollars are used to pay for government services that the public needs.

If there was no real estate industry the nation could not function so it’s importance is extreme. In commercial real estate especially the real estate tax can become an important variable. Often the real estate tax may be lessened for certain real estate if a company promises to bring industry to the are. The local governments realize that the profit brought in by a new business is more Page 10 profitable than the taxes that could be imposed on the building. Business bring in business and jobs and put money nto the city that just filters through and can rejuvenate a town.

Then by bringing in the business it jump-starts the economy and by weighing out the different options, the town can make the greatest profit. Either by taxing or buy the money that the new business can bring. Real Estate Conclusion In conclusion, there are many different parts that constitute real estate. There are different forms of real estate but all share many of the same characteristics. The cost of real estate is what is determining the economics of real estate. The balance and cycle of purchasing and selling real estate shapes the industry and economics.

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