04. The Real Estate Market - Characteristics of Real Estate

(1) Economic Characteristics of Land

There are generally four economic characteristics of land:

• Scarcity
• Modification
• Fixity, and
• Situs.

• Scarcity

Scarcity is a shortage of land in a given geographical area where there is a great demand for land. It is a human-made characteristic. One famous example of this is Manhattan Island in New York City. Manhattan Island is 13 miles long, two miles wide, and home to over 1.5 million people, with an additional 1.5 million commuting to Manhattan each day to work. The median sale price of a home in Lower Manhattan is $3 million.

These Manhattan prices, a result of scarcity, are in stark contrast with real estate just a short drive from Manhattan. Indeed, the further from New York City and into central and northern New York State a person might travel, the more likely to find either developed or undeveloped land at reasonable prices due to a sufficiency or over-sufficiency (i.e., a LACK of scarcity) of land relative to demand.

Modification

Modifications, also called improvements, are man-made developments made to real property. Modifications greatly influence land use and value. They can be anything from apartments to airports, schools to sewers, farms to factories.

Take airports, for instance. The land running adjacent to an airport is commercially valuable property. The land in the path of takeoff and landing points, however, is devalued due to high noise pollution levels from launching and landing aircraft (as well as the small but not insignificant risk of an airplane crash landing in the vicinity).

Thus, modifications (or improvements) don't always "improve" real property, and "improvements" can both raise and lower land values.

Fixity

Fixity, also called investment permanence, means that land, buildings, and other improvements require long periods of time to pay for themselves. For example, the income generated by an apartment or office building may take upwards of 20 or 30 years to repay the costs associated with developing the land and buildings.

For that reason, real estate investment and land-use decisions have to consider the long-term usefulness of improvements; projecting not only one or five years into the future, but 20 or 30 years down the line. It makes little sense to invest in an improvement with a five-year lifespan if it would take, in actuality, decades to pay for itself.

Fixity also refers to the immobility of property. Land cannot be moved from one location to another where it would be more valuable. For the most part, improvements to land follow this same general rule. With very few exceptions, the cost of moving a house, as well as preparing a foundation at a new site, exceeds the value of the home once the move is done. This is why an investment in real estate is regarded as a fixed or “sunk” cost.

Situs

Situs, or location preference, refers to a location from an economic rather than a geographic standpoint. Residential, commercial, and industrial properties have different location preferences for different reasons. For a residential area, natural factors like weather, views, and air quality affect situs, along with man-made factors like job opportunities, shopping, and schools. An industrial zone's situs depends on factors such as the availability of a labor market, ample water and electricity supplies, and access to railways.

Situs is the reason why house lots on street corners, corner offices, and apartments with commanding views are valued more highly than identically-sized lots in less-preferred locations. It's worth noting, however, that situs can change with time. The freeway-building boom of the 1950s and '60s, for example, increased situs in the suburbs.

The trend now, however, appears to be reversing. Historic downtown rehabilitation and a desire to shorten commutes have inspired people to move back into central, urbanized areas, increasing the situs in cities compared to that of the suburbs.

(2) Physical Characteristics of Land

Immobility

You cannot move a parcel of land. Yes, it is true that soil, sand, gravel, and minerals can be moved by nature (from erosion) or man (by digging). Despite those actions, however, the parcel is still physically located in the same geographical position on the globe.

Because land is immobile, a person must go to land—land cannot be brought to a person. When land is sold, the buyer must travel to that parcel of land; the land cannot be delivered to the buyer. For example, no one can bring Japan to Europe. Instead, when land is sold, the seller gives the buyer a document called a deed that transfers to the buyer the land and the right to use it.

Indestructibility

Land is indestructible; it is durable. Today, you can travel to the Middle East and walk on the same land that was walked on in Biblical days. You can travel the United States and use the same land that the Native Americans used a thousand years ago.

Many people buy land because it is durable. They feel that stocks, bonds, and paper money may come and go, but land will always endure. This is true in a physical sense, of course, but land’s ability to appreciate in value has to do with economic durability, not durability in the sense of it being physically indestructible.

Nonhomogeneity

Also known as heterogeneity, nonhomogeneity means that no two parcels of land are exactly alike—because no two parcels of land can occupy the exact same space on the globe. In courts of law, nonhomogeneity is described as a nonfungible commodity; meaning, land is unsubstitutable. For instance, in a contract to sell a home, the seller must transfer ownership of that specific home to the buyer; the seller cannot give the buyer a substitute home.

In contrast, homogenous or fungible goods are commodities that can be freely substituted in carrying out a contract. Goods like oil, wheat, and lumber, and items like stocks and bonds are homogenous. If you buy one piece of 2 x 8 x 16 No. 2 rough cedar lumber, that piece may be freely replaced by another piece of the same grade and dimensions. Similarly, one share of General Electric common stock can be substituted for another, since all are identical.