What Is Real Estate?

How Real Estate Works

Real estate affects the U.S. economy because it's a critical driver of economic growth. For individuals and businesses, it can be seen as an investment or merely a purchase to meet the buyer's or the company's needs.

Sometimes referred to as "real property," real estate is technically land plus any other tangible improvement that might rest upon it or be installed in it. The improvement might be a building that's been erected there or a roadway. It can be something that's been inserted into the ground, such as a septic system. Land with any of these structures is said to be "improved." It's "unimproved" when it lacks them.

Real estate involves numerous facets. It can segue from unimproved to improved. It can be purchased or sold. It might be owned by a government, a corporate entity, or by a private party. Certain components can directly impact the economy, such as consistent improvement of land and the individuals or entities that facilitate those transfers of ownership.

Construction of New Buildings

New home building is a critical aspect to look at when considering real estate and the economy. New home building includes the construction of single-family homes, townhouses, and condominiums. The National Association of Home Builders (NAHB) provides monthly data on home sales and average prices. The data on new home sales is a leading economic indicator.

Real Estate Agents

Real estate agents assist individuals, businesses, and investors in buying and selling properties. The industry is typically divided up into specialties.

Sellers or listing agents help find buyers through the Multiple Listing Service or their professional contacts. They price your property, using listings of recently sold homes known as "comparables," or "comps," because they're similar to yours. They can help you spruce up your property so it looks its best to potential buyers. They assist in negotiations with the buyer or the buyer's agent to get the highest price possible.

Buyers' agents provide similar services for the home purchaser. They know the local market, so they can find a property that meets your most important criteria. They also compare prices, a process that's referred to as "doing comps." This helps them guide you to areas that are affordable. Buyers' agents negotiate for you, pointing out reasons why the seller should accept a lower price. They can help with the legalities of the process, including title search, inspection, and financing. 

Types of Real Estate

There are four types of real estate.

Residential Real Estate

Residential real estate includes both new construction and resale homes. The most common category is single-family homes, but there are also condominiums, co-ops, townhouses, duplexes, triple-deckers, quadplexes, high-value homes, multi-generational homes, and vacation homes.

Commercial Real Estate

Commercial real estate includes shopping centers and strip malls, medical buildings, educational buildings, hotels, and offices. Apartment buildings are often considered commercial, even though they're used for residences, because they're owned to produce income.

Industrial Real Estate

Industrial real estate includes manufacturing buildings and property, as well as warehouses. The buildings can be used for research, production, storage, and distribution of goods. Some buildings that distribute goods are considered to be commercial real estate. The classification is important because zoning, construction, and sales can be handled differently for this type of property.

Vacant Land

Land includes vacant lots, working farms, and ranches. The subcategories within vacant land include undeveloped, early development or reuse, subdivision and site assembly.

Understanding Real Estate Market Numbers and Data

Statistics about new home construction are important leading economic indicators. They can give you a heads-up on the future of the housing market. The Census Bureau reports on new housing starts and completions monthly.

Each of these indicators tells a slightly different story about the health of the homebuilding industry. For example, it would take a toll on home sales if home sales were steady, but housing starts were to decline. Many buyers might not want to wait longer than a year for a home to be built. Slower housing starts could also mean that there's a shortage of lumber, concrete, or construction workers. Those shortages could drive up costs and sales prices.

If mortgages decline, the homebuilder will end up with an inventory of unsold homes for sale. Perhaps demand is high, but homeowners can't get mortgages. Rising home starts might seem like an indicator of housing strength, but declining home closings mean the housing market is weak. 

Three other indicators are important to watch:

• Inventory: The total number of homes that are available for sale (but unsold) reported by the NAHB monthly
• Months of supply: How many months it would take to sell all the houses in inventory based on the sales rate and inventory, also reported by the NAHB monthly
• Sales prices: The median and average new home sales price

The Census Bureau reports new home sales prices, but the National Association of Realtors provides monthly reports on the number of homes resold and their average price. Resale data can provide a better indicator of the health of the overall housing industry than new home construction because new home builders can be overenthusiastic about future sales. Overzealous homebuilders can overbuild or cut prices to encourage sales.

Investing in Real Estate

Anyone who buys or sells a home engages in real estate investing, and this means considering several factors. Will the house rise in value while you live in it? How will future interest rates and taxes affect you if you get a mortgage?   

Some people do so well investing in their own homes that they want to buy and sell homes as a business. You might flip a house by buying it, improving it, and then selling it. Many people own several homes and rent them out. Others use Airbnb or a similar service as a convenient way to rent out all or part of their homes.

You can also invest in housing without buying a home. You can buy stocks of homebuilders. Their stock prices rise and fall with the housing market. Another investing strategy involves real estate investment trusts (REITs). These real estate funds pool investor contributions and let fund managers invest those contributions in real estate. The investors collectively own the property, whether it's residential, commercial, or anything else. As real estate investments, REITs are covered by some regulations that don't affect typical corporate equity funds, including a legal obligation to pass at least 90% of profits through to investors.