Real estate is not property rights. All of the theorizing about how property rights work that actually matters in real estate was done in the 1200s. You can find it all written down on the Magna Carta. There has not been innovation in that realm of thinking for centuries.
Real estate is not the economy. It is related to the economy, obviously. But everything in the modern world is related to the economy, whether it wants to be or not.
Real estate is a marketplace. That means it responds to two things: Supply and demand. Property rights and economic limitations are relevant to understanding whether supply is higher, or demand is higher. But it is important to understand that supply and demand are more fundamental to the exchange of real estate in the United States than anything else.
Today, we are going to talk about how real estate works in the United States. We are going to skip over talking about specifics; there are far too many types of contracts and techniques of getting value out of real estate for anyone to do that in short order.
Instead, we are going to talk about what it means for real estate to be exchanged in a market.
Real Estate in a Capitalist Society
Imagine that the government owned everything. All of the land, all of the resources on it, and anything that anyone made on that land. If something fell within the country’s borders, the government would be the owner of that thing. What would that mean, legally speaking?
It would mean that land could not be bought or sold. It could be negotiated between interests, but that negotiation would happen at the speed of bureaucracy. And if you were able to acquire land for a purpose, it would be for only that purpose. You would not be free to use it.
The United States does not work like that. In this country, land can be owned by individuals. What does that mean? Well, it means you can do as much or as little negotiating for it as you like. You can care as much or as little for how it will be used as you like.
But most importantly, a person can come into possession of any land they want and use it however they want. This is because the defining trait of the United States’ real estate market is the ability for a single property to host many potential methods of extracting value.
Extracting Value Out of a Property
Now, think of a vacant lot in the middle of a city. It sits between two massive apartment buildings. The whole street is apartment buildings, with the nearest coffee shop a half mile walk away from it. You own this vacant lot. And that means you can do whatever you want with it.
Most people will get value out of that vacant lot in one of two ways: The first is by selling the vacant lot and letting someone else worry about how to get value out of it in the long term.
The second is much more complicated. However, it also plays to that capitalist strength we described earlier. You can also transform that vacant lot into a business.
We mentioned how the closest coffee shop among all those living spaces was half a mile away. People would probably prefer to walk down the street for coffee rather than half a mile. Rather than selling the vacant lot, you can get a loan to have a coffee shop constructed there.
It Doesn’t End There
But if you are in a big city, then building a coffee shop does not just mean building a coffee shop. Right off the bat, you can sell that shop after it is built for much more money than you would get out of selling a vacant lot. You can also rent it out to a small business startup.
Anyone who has lived in a big city will tell you that rarely is a shop just a shop. After all, you have all that infrastructure for building vertically. Because of that, you can also get that construction company to build apartments on top of the coffee shop that you build.
You can run the coffee shop, hire staff for it, sell it, or lease it. And then you can do all of those for the apartments above it as well—together or separately.
Back to Supply and Demand
That is how most of the real estate market functions in the United States. People buy properties, turn them into something profitable, and either use them as passive income or sell them outright. But like we said before, the “how” is one thing. The “why” is something else entirely.
The reason why this happens boils down to supply and demand. There is a demand for homes, apartments, and spaces for business. Controlling the supply means profiting off of that demand.
But here is the real crucial thing to understand: When demand outpaces supply, scarcity is created. This drives prices up. But when supply outpaces demand, that means a price crash is imminent. There is too much of a good thing, and everyone is undercutting each other’s prices.
The same thing applies to the real estate market. Whether it is housing or business spaces, due to being in a capitalist system where people can do with their properties as they want, real estate is a commodity. And that means the value of it is subject to supply and demand.
To recap: In the United States, people personally own property. And because they own it, they can transform it at will. This process of buying, owning, transforming, and then selling properties is the backbone of the real estate market in the United States.
That market is subject to supply and demand, just like any market. And that means its prices will increase with demand and decrease with supply.
If you are looking for a good place to learn more, try Teifke Real Estate.