Chapter 1
INTRODUCTION TO REAL ESTATE
ECONOMICS
1st Semester, S.Y 2014-2015
Pangasinan State University
Social Science – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
Econ 127 – REAL ESTATE ECONOMICS
Chapter Outline
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
Definition of Real Estate Economics
Importance of Real Estate Economics
Microeconomics vs. Macroeconomics
Land as an Economic Resource
Renewable and Nonrenewable Resources
Estate
Categories of Estates
Land: Surface and Subsurface Rights
Real Estate
Economic and Physical Characteristics of Land / Real Estate
Real Property
Bundle of Rights
Real Property vs. Personal Property
Fixtures
Trade Fixtures
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What is Real Estate Economics?
 A study of people & how their actions affect
property values.
 Application
of economic
principles
techniques to the real estate market.
and
 Develops theories and models that help people
think through the complicated dynamics of
property, value and exchange.
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Econ 127 – REAL ESTATE ECONOMICS
What is Real Estate Economics?
General Economics
Principles
and Theory
Real Estate
Economics
Real Estate
Principles
and Practice
Real estate economics draws principles from both general
economics and real estate practice. It then combines them to
study changes in real estate use, value, and activity. The
focus is on real estate change. The main reason to study real
estate economics is to help understand issues and changes,
and the impact these will have on local real estate use and
values.
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Econ 127 – REAL ESTATE ECONOMICS
Real Estate Defined
 Land and attachments (buildings).
 This refers to land or land improvements,
and the rights of use associated with the
ownership.
 Property, land or fixtures whose nature is
definable and whose ownership rights are
specifiable through law.
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Econ 127 – REAL ESTATE ECONOMICS
Economics Defined
Economics deals with how individuals and
societies choose to allocate and use scarce
resources to produce, distribute, and consume
goods and services.




The study of choices
The study of scarcity
The study of resource allocation
The study of production and consumption
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Econ 127 – REAL ESTATE ECONOMICS
Two Categories of Economics
Macroeconomics. It is concerned with the
economy as a whole and issues affecting it,
including unemployment, inflation, economic
growth, fiscal and monetary policy.
Microeconomics. This analyzes the behavior of
the individual units in the economy such as
households and firms, markets, and their
interactions.
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Social Science – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
Econ 127 – REAL ESTATE ECONOMICS
Let’s Check Your Understanding!
Determine whether each of the following cases on real estate
economics is a concern of microeconomics or macroeconomics.
1. The percentage contribution of real estate segment in
the increase of GDP
2. Mr. Cruz’s decision whether to rent an apartment or buy
a housing unit
3. Occurrence of real estate bubble in recent years
4. The determinants that affect the supply of retail spaces
in SM Malls
5. The price to be charged for a three-night stay in a
luxurious resort
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BACHELOR OF ARTS IN ECONOMICS
Econ 127 – REAL ESTATE ECONOMICS
Why Study Real Estate Economics?




Understand value fluctuations
Estimate real estate values
Solve real estate problems
Understand fluctuations & changes to local real estate
markets.
 Personal reasons
 To best understand owning v. renting, buying v. investing,
when to buy, what to buy, how to buy, where to buy.
 Professional reasons
 To best serve customers in their real estate transactions—
property or financing or investment advice.
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Econ 127 – REAL ESTATE ECONOMICS
Why is Real Estate Economics so Interesting?
 Everything that we do also involves real estate:
where we live, where we work, where we play, and
more. And every real estate decision is also an
economic decision! One dream of a Filipino is to buy
a home—but where? And how?
 Today, almost every other newspaper headline
involves issues in real estate economics—mortgage
problems, interest rates, the impact of real estate
employment, foreclosures, property values—all are
issues that are discussed here!
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Economic Resources in Real estate
Economic resources in real estate are inputs used
by developers in the building or construction
process. These may include the following:
1.
2.
3.
4.
Land
Labor
Capital
Entrepreneurial skills
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Economic Resources in Real Estate
Land includes all the natural resources found in nature
a country possesses, such as water, minerals,
animals, and forests.
Labor is the work time and work effort that people
devote to producing goods and services.
Capital refers to produced goods that can be used as
resources for further production.
Entrepreneurship is the human resource that combines the factors of production creatively and
efficiently.
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Let’s Check Your Understanding!
Determine what category of resources in real estate sector
does each of the following belong.
1. Cement and bricks
2. Heavy-duty trucks
3. Civil engineer
4. Water system
5. Construction site
6. Construction workers
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Land as an Economic Resource
The category of resources that we call ‘‘land’’ refers
not just to the land surface, but to everything
associated with the land—the natural resources.
Rent is considered the resource payment for land.
Natural resources are the nonproduced resources
with which a society is endowed. Natural resources
are categorized as renewable and nonrenewable
resources.
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Renewable vs. Nonrenewable
Resources
Nonrenewable resources (also known as exhaustible
resources) have a fixed supply that is depleted as the
resource is consumed .Examples include coal, natural
gas, and oil. The market for nonrenewable natural
resources consists of the demand for and supply of
these resources. Supply depends on the amount of
the resource, and the supply curve is perfectly
inelastic.
Renewable resources are nonexhaustible resources
which can be used repeatedly without depleting the
amount available for future use.
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Definition of Estate
The term estate means “all that a person owns.”
The term real estate means all realty owned as a
part of an individual’s estate. The term estates in
real property is used to describe the extent to which
rights and interests in real estate are owned. A
system of modifiers has evolved, based on English
property law, that describes the nature or collection
of rights and interests being described as a part of a
transaction.
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Estates in Possession vs. Estates not In
Position (Future Possession)
An estate in possession (a present estate in land) entitles its
owner to immediate enjoyment of the rights to that estate. An
estate not in possession (a future estate in land), on the other
hand, does not convey the rights of the estate until some time in
the future, if at all. An estate not in possession, in other
words, represents a future possessory interest in property.
Generally, it does not convert to an estate in possession until
the occurrence of a particular event. Estates in possession are
by far the more common. When most people think of estates,
they ordinarily have in mind estates in possession. Obviously,
lenders and investors are very interested in the nature of the
estate possessed by the owner when considering the purchase
or financing of a particular estate in property
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Two Types of Future Estates
1. Reversion
2. Remainder
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Reversion
A reversion exists when the holder of an estate in
land (the grantor) conveys to another person (a
grantee) a present estate in the property that has
fewer ownership rights than the grantor’s own estate
and retains for the grantor or the grantor’s heirs the
right to take back, at some time in the future, the full
estate that the grantor enjoyed before the conveyance.
In this case, the grantor is said to have a reversionary
fee interest in the property held by the grantee. A
reversionary interest can be sold or mortgaged
because it is an actual interest in the property.
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Reversion
A remainder exists when the grantor of a present
estate with fewer ownership rights than the
grantor’s own estate conveys to a third person the
reversionary interest the grantor or the grantor’s
heirs would otherwise have in the property upon
termination of the grantee’s estate. A remainder is
the future estate for the third person. Like a
reversion, a remainder is a mortgageable interest
in property.
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Freehold vs. Leasehold Estates
Estates in possession are of two general types: freehold
estates and leasehold estates. These types of estates are
technically distinguished on the basis of the definiteness or
certainty of their duration. A freehold estate lasts for an
indefinite period of time; that is, there is no definitely
ascertainable date on which the estate ends. A leasehold
estate, on the other hand, expires on a definite date. Aside
from this technical distinction, a freehold estate connotes
ownership of the property by the estate holder, whereas a
leasehold estate implies only the right to possess and use
the property owned by another for a period of time.
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Examples of Freehold Estates
A fee simple estate, also known as a fee simple absolute
estate, is the freehold estate that represents the most
complete form of ownership of real estate. A holder of a fee
simple estate is free to divide up the fee into lesser estates
and sell, lease, or borrow against them as he or she wishes,
subject to the laws of the state in which the property is
located.
Life estate, which is a freehold estate that lasts only as long
as the life of the owner of the estate or the life of some other
person. Upon the death of that person, the property reverts
back to the original grantor (transferor of property), his or her
heirs, or any other designated person.
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Two Types of Leasehold Estates
An estate for years is the type of leasehold estate investors
and lenders are most likely to encounter. It is created by a lease
that specifies an exact duration for the tenancy. The period of
tenancy may be less than one year and still be an estate for
years as long as the lease agreement specifies the termination
date.
An estate from year to year (also known as an estate from
period to period, or simply as a periodic tenancy) continues for
successive periods until either party gives proper notice of its
intent to terminate at the end of one or more subsequent
periods. A “period” usually corresponds to the rent-paying
period. Thus, such a tenancy commonly runs from month to
month, although it can run for any period up to one year.
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Two General Classifications of Estates
1. Based on Rights: Estates in Possession versus
Estates Not in Possession (Future Possession)
2. Based on Possession and Use: Freehold versus
Leasehold Estates
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Land, Real Estate and Real Property
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Land
Land is defined as the earth's surface extending downward to
the center of the earth and upward into space, including
permanent natural objects such as trees and water.
Land includes not only the surface of the earth but also the
underlying soil. It refers to things that are naturally attached to
the land, such as boulders and plants. It includes minerals and
substances that lie far below the earth's surface. Land even
includes the air above the earth, all the way into space. These
are known respectively as the subsurface and the airspace.
Most of the surface of the earth, of course, is water. Special
state and local laws govern the ownership of these parts of the
earth, including lakes and rivers.
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Real Estate
Real estate is defined as land at, above, and below the
earth's surface, and all things permanently attached to
it, whether natural or artificial.
The term real estate is somewhat broader than the term
land; it includes not only the natural components of the
land but also permanent man-made improvements on
and to the land. An improvement is any artificial thing
attached to land, such as a building or fence, or
improvements such as streets, utilities, and sewers.
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Real Property
Real property includes both land and real estate. It is
defined as the interests, benefits and rights that are
automatically included in the ownership of the land and
real estate.
Real property includes the earth surface, subsurface,
and airspace, including all things permanently attached
to it by nature or people, and the legal rights innate to
the ownership of a parcel of real estate.
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Bundle of Legal Rights
Traditionally, ownership rights of real property are described
as a bundle of legal rights. These rights include the
 The rights of possession
 Right to control the property within the framework of the
law
 Right of enjoyment (to use the property in any legal
manner)
 Right of exclusion (to keep others from entering or using
property
 Right of disposition (to sell, will, transfer, or otherwise
dispose of or encumber the property
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Bundle of Legal Rights
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Surface and Subsurface Rights
Surface Rights are the rights to use the surface of the earth.
Subsurface rights are the rights to natural resources lying
below the earth’s surface. An owner may transfer rights
without transferring the subsurface rights.
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Air Rights
Air rights. The rights to use the space above the earth may
be sold or leased independently, provided the rights have not
been preempted by law. Air rights can be an important part of
a real estate, particularly in cases where the air rights must
be purchased to construct large office buildings. To construct
such a building, the developer must purchase not only the
rights but also numerous small portions of the land’s surface
for the building’s foundation supports
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Water Rights
Water rights are special common-law rights held by owners
of land adjacent to rivers, lakes, or oceans and are
restrictions on the rights of land ownership. Water rights are
particularly important rights in drier western states, where
water is a scarce and valuable public commodity
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Characteristics of Land / Real Estate
Economic Characteristics




Scarcity
Improvements
Permanence of Investment
Location or Area Preference
Physical Characteristics
 Immobility
 Indestructibility
 Uniqueness
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Scarcity
Land isn't generally considered a rare commodity, but
only about a quarter of the earth's surface is dry land;
the rest is water. The total supply of land is not
limitless. Even though a considerable amount of land
remains unused or uninhabited, the availability of land
in a given location or of a particular quality is limited.
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Improvements
Building an improvement on one parcel of land also
can affect the land’s value as well as the use of
neighboring tracts and whole communities. For
example, improving a parcel of real estate by
building a shopping center or selecting a site for a
nuclear power plant or toxic waste dump can
dramatically change the value of land in a large
area.
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Permanence of Investment
The capital and labor used to build the improvement
represent a large fixed investment. Although even a
well-built structure can be razed to make way for a
newer building, improvements such as drainage,
electricity, water, and sewerage remain. The return
on such investments tends to be long-term and
relatively stable.
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Location or Area Preference
Area preference or situs ("to place") refers not only
to geography but also to people's preference for a
specific area. Area preference is based on several
factors, such as convenience, reputation, and
history. It is the unique quality of these preferences
that results in the different price points for similar
properties. Location is often considered the single
most important economic characteristic of land
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Immobility
Although some of the substances of land are
removable an topography can be changed, the
geographic location of any given parcel of land can
never be changed. Its location is fixed – immobile.
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Indestructibility
Land is also indestructible. This permanence of
land, coupled with the long-term nature of
improvements, tends to stabilize investments in real
property.
The fact that land is indestructible does not,
however, change the fact that the improvements
depreciate and can become obsolete, which may
dramatically reduce the land's value. This gradual
depreciation should not be confused with the fact
that the economic desirability of a given location can
change.
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Uniqueness
Uniqueness, or nonhomogeneity, is the concept that
no two parcels of property are exactly the same or
in the same location. The characteristics of each
property, no matter how small, differ from those of
every other. An individual parcel has no substitute
because each is unique.
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Two Categories of Property
1. Real Property
2. Personal Property
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Real Property vs. Personal Property
Real property (Realty)
 refers to land and things permanently attached to it.
 pertains to land improvements, and the rights of
use associated with the ownership.
Personal property (Chattels or Personalty)
 all property that can be owned and does not fit the
definition of real property.
 generally refers to everything else: the items which
are movable and not part of the land.
 Examples: chairs, tables, computer, clothing,
money, bonds, and bank accounts.
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Tangible vs. Intagible Personal Property
Tangible personal property
 Refers to any type of property that can generally be
moved (i.e., it is not attached to real property or land),
touched or felt. These generally include items such as
furniture, clothing, jewelry, art, writings, or household
goods.
Intangible personal property
 Called "intangibles“. This refers to personal property that
cannot actually be moved, touched or felt, but instead
represents something of value such as negotiable
instruments, stocks, bonds, securities, patents, service
assets.
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Let’s Check Your Understanding!
To which category of properties does each of the following
belong?
1. Clothing
2. Motor vehicles
3. Office building
4. Negotiable instruments
5. Parking lot
6. Shopping mall
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Fructus Naturales vs.
Fructos Industriales
Tress and crops (plants) generally fall into two classes:
Fructus Naturales.
 These are trees, perennial bushes, and grasses that do
not require annual cultivation. These items are
considered real estate.
Fructus Industriales
 Annual cultivated crops of fruit, vegetables, and grain
which are known as emblements. These things are
generally considered real estate property.
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Severance and Annexation
An item of real property can become personal property by
severance. For example, a growing tree is real estate until
the owner cuts it down, literally severing it from the real
estate. Similarly, an apple becomes personal property once
it is picked from a tree.
It is also possible to change personal property into real
property through the process known as annexation. For
example, if a landowner buys cement, stones, and sand
and then mixes them into concrete and construct a
sidewalk, the landowner has converted personal property
(cement, stones, and sand) into real property (a sidewalk).
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Fixtures
Fixture is personal property that has been so
affixed to the land or a building that, by law, it
becomes part of the real property.
Examples of fixtures are heating plants, elevator
equipment in highrise buildings, radiators, kitchen
cabinets, light fixtures, and plumbing.
Almost any item that has been added as a
permanent part of a building is considered a
fixture.
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Attachment
Personal property is converted into a fixture by the
process of attachment. For example, if a piece of
lumber sits in a lumber yard it is a chattel. If the same
lumber is used to build a fence on the land it becomes
a fixture to that real property. In many cases, the
determination of whether property is a fixture or a
chattel turns on the degree to which the property is
attached to the land. For example, this problem arises
in the case of a trailer home. In this case the
characterization of the home as chattel or realty will
depend on how permanently it is attached--such as
whether the trailer has a foundation.
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Legal Tests of a Fixture
1. Method of annexation. How permanent is the
method of attachment? Can the item be removed
without causing damage to the surrounding
property?
2. Adaptation to real estate. Is the item being used
as real property or personal property? For
example, a refrigerator is usually considered
personal property. However, if a refrigerator has
been adapted to match the kitchen cabinetry, it
becomes a fixture.
3. Agreement. Have the parties agreed to treat an
item as though it is real or personal property?
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Trade Fixtures
Trade fixture is a special category of fixtures which
includes property used in the course of business. An article
owned by a tenant and attached to a rented space or
building or used in conducting a business is a trade
fixture, or a chattel fixture.
Some examples of trade fixtures are bowling alleys, store
shelves, and barroom and restaurant equipment.
Agricultural fixtures, such as chicken coops and tool sheds,
are also included in this category. Trade fixtures must be
removed on or before the last day the property is rented.
The tenant is responsible for any damage caused by the
removal of a fixture. Trade fixtures that are not removed
become the real property of the landlord.
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Trade Fixtures vs. Fixtures
Trade fixture differ from fixtures generally in these ways:



Fixtures belong to the owner of the real estate, but trade
fixtures are usually owned and installed by a tenant for
the tenant’s use.
Fixtures are considered a permanent part of a building,
but trade fixtures are removable. Trade fixtures may be
affixed to a building so as to appear to be fixtures, but the
tenant has the right to remove them on or before the last
day of the lease.
Legally fixtures are real property so they are included in
any sale or mortgage. Trade fixtures, however, are
considered personal property and are not included in the
sale or mortgage of real estate.
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