[Wcurve-announce] NUMBER ONE Success System

Tommy Lee noss1233 at gmail.com
Wed Aug 22 06:56:31 EDT 2007


The owner/user, owner, and renter comprise the demand side of the market,
while the developers and renovators comprise the supply side. In order to
apply simple supply and demand analysis to real estate markets a number of
modifications need to be made to standard microeconomic assumptions and
procedures. In particular, the unique characteristics of the real estate
market must be accommodated. These characteristics include:

   - Durability - Real estate is durable. A building can last for decades
   or even centuries, and the land underneath it is practically indestructible.
   Because of this, real estate markets are modeled as a stock/flow market.
   About 98% of supply consists of the stock of existing houses, while about 2%
   consists of the flow of new development. The stock of real estate supply in
   any period is determined by the existing stock in the previous period, the
   rate of deterioration of the existing stock, the rate of renovation of the
   existing stock, and the flow of new development in the current period. The
   effect of real estate market adjustments tend to be mitigated by the
   relatively large stock of existing buildings.
   - Heterogeneous - Every piece of real estate is unique, in terms of
   its location, in terms of the building, and in terms of its financing. This
   makes pricing difficult, increases search costs, creates information
   asymmetry and greatly restricts substitutability. To get around this
   problem, economists (beginning with Muth (1960)) define supply in terms of
   service units, that is, any physical unit can be deconstructed into the
   services that it provides. Olsen (1969) describes these units of housing
   services as *an unobservable theoretical construct*. Housing stock
   depreciates making it qualitatively different from a new building. The
   market equilibrating process operates across multiple quality levels.
   Further, the real estate market is typically divided into residential,
   commercial, and industrial segments. It can also be further divided into
   subcategories like recreational, income generating, area,
   historical/protected, etc.
   - High Transaction costs - Buying and/or moving into a home costs much
   more than most types of transactions. These costs include search costs, real
   estate fees, moving costs, legal fees, land transfer taxes, and deed
   registration fees. Transaction costs for the seller typically range between
   1.5 - 6% of the purchase price.
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