Economics of Real Estate
Introduction
The economics of real estate and supply and demand are in a push-pull type relationship
and many factors affect them. There will always be bubbles and crashes in the real estate market
due to the evaluation of how price challenges how the market is forecasted. The supply and
demand between buyers and sellers and the real estate market define value and how real estate is
distributed. The factors that affect supply and demand are population growth, property taxes, the
government, income, inflation, the availability of land, and demographics.
RQ1 What is the theory of supply and how does it relate to real estate markets?
Theory
The theory of supply in real estate has an inverse relationship with price due to having a
plethora of assets the price of the assets will decrease and vice versa. An example of this is when
the Federal Reserve lowered their rates so in the real estate market there were a lot of people who
were refinancing, and new buyers were looking to buy homes. Additionally, the theory of supply
views the higher price that the market provides then those in the industry will have to compete
for fewer resources. Economists analyze market behavior through the lens of the neoclassical
theory of market equilibrium which considers the price and how that price reflects upon the
supply and demand in the market (Marshall, 2009, Citation, 1920). Economic theory advocates
that the demand for housing will impact how much housing can be attained and at what cost
(Günnewig-Mönert & Lyons, 1970).
Research
The resiliency of the housing supply increases when there are fewer resources, and it is
stagnant if the price rises (Pirounakis, 2013). When the cost of money is lower a credit supply
shock it's positive to a consumer because there is more capital available to pay for housing
Economics of Real Estate
(Dong et al., 2022). The government regulates the supply by adjusting interest rates and
increasing inflation to bolster the economy (Kanen, 2019).
Analysis
Development feasibility plays a major role when analysts devote attention to supply.
When the supply side is analyzed certain factors such as the different trends that affect the
market, vacancy rates, prices, and what construction is going on in the area are vital (Brett &
Schmitz, 2013). When the market supply is reduced it affects the cost of the investments and
reduces the surplus of assets. The contrast between the cost of money and the return on the
investment mirrors the investor’s excess in the market.@(Trinh, 2022).
RQ2 What is the theory of demand and how does it relate to real estate markets?
Theory
The theory of demand and how it relates to the real estate market is affected at the local
level, the regional level, and the national level (Brett & Schmitz, 2013). The theory of demand
reiterates the exchange between customers and what they deem valuable according to the price of
goods. An example of the relationship with the demand curve is as the price of goods decreases
the demand for the good increases and vice versa. Furthermore, consumers have an expectation
for the goods they pay for and the demand is attached to the price for a specific time frame (Chen
& Yang, 2020).
Research
Those in the real estate industry need to understand the driving force behind economic
growth and how different industries conjoined with large employers Are important factors to
consider when breaking down the demands of the housing industry (Brett & Schmitz, 2013). Job
creation and a growing labor force spurs the economy which brings about the demand, so
Economics of Real Estate
investors are willing to invest (Brett & Schmitz, 2013). An example of demand is looking at
different industries and what that community needs whether it's a tourist attraction that needs
more hotels, office buildings that need fewer buildings built, or a residential area that could use
more homes (Brett & Schmitz, 2013). Another factor that affects demand and the type of housing
that will be in a particular area is the age of the population which can powerfully influence
demand.
Analysis
Analyzing the demand in real estate speaks to employment growth and how jobs or the
lack of jobs can affect demand (Brett & Schmitz, 2013). Analysts look at the housing market and
factor in homes that have been deteriorated abandoned and can no longer be of use. Analysts go
beyond looking at demand and are forced to look at expansion, or high-profile companies that
will move into an area due to those companies bringing more demand for the market. Land use is
determined by demand and the shifts in demand determine the price (Evans, 2004).
RQ3 In your opinion, which two factors of supply impact real estate markets the most?
Theory
The availability of land that can be used and the price of housing are two factors of
supply that impact real estate the most. In the classical theory of Ricardo, it states that there is
only so much land that can be used and from a societal viewpoint the return on investment from
land will be in excess. Value creation and value distribution help to create market equilibrium so
the availability of land and the price of that land can be stable. The market equilibrium theory
analyzes how players in the real estate industry are affected by the relationship of demand and
how price plays a role in the value of the market. When demand and supply are balanced the
quantity theory of money affects the price in the market (Congdon, 2024).
Economics of Real Estate
Research
There is still more research that needs to be done on Alright how demand and prices
intertwine.
Nakajima and Telyukova (2017) that there is much-needed research to be done on reverse
mortgages and housing prices and how demand is affected. Haurin@et@al. (2016) state that the
issue of seniors doing reverse mortgages locking up their equity is complex due to the lack of
understanding that a senior may have concerning their property. With seniors living longer there
is an increasing demand for more housing and with a lot of them being baby boomers and being
a part of a large group housing prices have been influenced by this group (Gong & Yao, 2022).
Analysis
When the supply impact of price and land is analyzed, there is an assumption using the
neoclassical analysis about land having alternatives (Evans, 2004). In addition to land and price,
real estate behavior with a multitude of participants plays a role in the supply and how changes
in the real estate market value are distributed (Trinh, 2022). Government policies affect assets
and real estate development. When the government steps in and reduces the supply of funding
available it affects the economy. One road the government can travel is to implement short-term
regulations that will attract consumers and these subtle changes could improve housing prices
and help to stabilize the market (Zang & Gu, 2023).
RQ4 In your opinion, which two factors of demand impact real estate markets the most
Theory
Government and demographics impact real estate markets the most when viewing
demand. As the demand for housing increases the local economy will start to improve. The price
of housing is a major factor affecting demand and an increase in housing leads to a decrease in
Economics of Real Estate
the demand. Demographics play a crucial role in the real estate market coupled with household
income and interest rates (Arnott, 1987). With the government involved it touches on the justice
motivation theory which addresses clear injustice with the potential of public investigation
(Nadeau et al., 2020). An example of this is redlining where people of color were not allowed to
buy houses in certain areas due to the federal government’s encouragement.
Research
There will always be a need for policy and governmental influence but where these
policies fail is that they fail to understand the entire market on demand and focus on what can
help bring more dollars into the economy (Nadeau et al., 2020). There will always be those that
win with these changes and those that lose. Real estate investments are determined by the
comprehensive strength of the economy. A decline in demand negatively shocks the economy
(Arnott, 1987).
Analysis
When the government intervenes and regulates interest rates it can stimulate demand in
the real estate market. The consumers of those properties take into consideration the quality of
the neighborhood, the school in the area, crime, and property taxes all of which the government
can have a hand in helping or hindering (Arnott, 1987). The competitiveness of the market
intertwines with the government’s role in the housing market Provides minimal guidance
concerning government intervention and what policies are working utilizing the existing theories
(Arnott, 1987). Demographics her causing housing prices and the demand to be restructured due
to age and the rising life expectancy coupled with relocation just to be able to afford a particular
market (Gong & Yao, 2022).
Economics of Real Estate
Conclusion
There has been compelling growth in the past decades in the real estate realm in the
pricing of housing (Gong & Yao, 2022). The economics of real estate and supply and demand
are in a push-pull type relationship and many factors affect them. There will always be bubbles
and crashes in the real estate market due to the evaluation of how price challenges how the
market is forecasted. The supply and demand between buyers and sellers and the real estate
market define value and how real estate is distributed. The factors that affect supply and demand
are population growth, property taxes, the government, income, inflation, the availability of land,
and demographics. The rise of the baby boomers retiring and living longer will not cause a
housing crisis (Gong & Yao, 2022).
Economics of Real Estate
References
Arnott, R. (1987). Chapter 24 Economic theory and housing. Handbook of Regional and Urban
Economics, 959– 988. https://doi.org/10.1016/S1574-0080(87)80010-X
Brett, D. L., & Schmitz, A. (2013).@Real Estate Market Analysis: Methods and Case Studies, Second
Edition, Urban Land Institute.@ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/liberty/detail.action?docID=1158859.
Chen, S., & Yang, J. J. (2020). Housing Price Dynamics, Mortgage Credit, and Reverse Mortgage
Demand: Theory and Empirical Evidence. Real Estate Economics, 48(2), 599-632.
https://doi.org/10.1111/1540-6229.12230
Congdon, T. (2024). The Quantity Theory of Money: A New Restatement. Corporate Finance Institute.
https://iea.org.uk/publications/the-quantity-theory-of-money-a-new-restatement/#References
Dong, D., Liu, Z., Wang, P., & Zha, T. (2022). A theory of housing demand shocks. Journal of
Economic Theory, 203, 105484. https://doi.org/10.1016/j.jet.2022.105484
Evans, A. W. (2004).@Economics, Real Estate and the Supply of Land, John Wiley & Sons,
Incorporated, 2004.@ProQuest Ebook Central.
http://ebookcentral.proquest.com/lib/liberty/detail.action?docID=470519.
Günnewig-Mönert, M., & Lyons, R. C.@(1970).@Housing prices, costs, and policy: The housing supply
equation@in Ireland since Real Estate Economics.@https://doi.org/10.1111/1540-6229.12491
Gong, Y., & Yao, Y. (2022). Demographic changes and the housing market. Regional Science and
Urban Economics, 95, 103734. https://doi.org/10.1016/j.regsciurbeco.2021.103734
Economics of Real Estate
Haurin, D., Ma, C., Moulton, S., Schmeiser, M., Seligman, J., & Shi, W. (2016). Spatial Variation in
Reverse Mortgages Usage: House Price Dynamics and Consumer Selection.@The Journal of Real
Estate Finance and Economics,53, 392–417.
Marshall, A. (2009).@Principles of economics: Unabridged Eighth Edition. Cosimo, Inc.
Nadeau, J., Wardley, L., & Dorohoi, A. (2020). Justice motivation theory in sustainable home
purchases.@International Journal of Housing Markets and Analysis, 13(5), 809-
823. https://doi.org/10.1108/IJHMA-08-2019-0082
Nakajima, M., & Telyukova, I. A. (2017). Reverse Mortgage Loans: A Quantitative Analysis. The
Journal of Finance, 72(2), 911-950. https://doi.org/10.1111/jofi.12489
Pirounakis, N. G. (2013).@Real Estate Economics: A Point-To-Point Handbook, Taylor & Francis
Group.@ProQuest Ebook Central. http://ebookcentral.proquest.com/lib/liberty/detail.action?
docID=1114698.
Trinh, T. H. (2022). Theoretical foundations of real estate market behavior.@Cogent Business &
Management,@9(1)https://doi.org/10.1080/23311975.2022.2132590
Zang, T., & Gu, H. (2023). State-Space Modeling of Housing Sentiment for Regressing Changes of Real
Estate Prices Following Short-Term Control Policy in China.@Sustainability,15(16), 12660.
https://doi.org/10.3390/su151612660
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