What Is Real Estate?

Real Estate Explained

Image shows three clusters of buildings, the first is suburban homes and trees, the second is skyscrapers and office buildings, and the third is a factory. next to the factory is just empty land. Text reads: "what is real estate? real estate is defined as the property, land, buildings, and air rights above land, and underground rights below the land. Residential, commercial, industrial, and vacant land."

Image by Ashley Nicole DeLeon / The Balance 2019

Real estate can include property, land, buildings, air rights above the land, and underground rights below the land. The term refers to real, or physical, property. Real estate also refers to producing, buying, and selling property. It affects the U.S. economy because it's a critical driver of economic growth.

The U.S. Constitution initially restricted voting rights to only owners of real estate.

Definition and Examples of Real Estate

Real estate, sometimes referred to as real property, is technically land plus any other tangible improvement that might rest upon it or be installed in it. The improvement might be a building that's been erected there, or a roadway. It can be something that's been inserted into the ground, such as a septic system. Land with any of these structures is said to be improved. It's unimproved when it lacks them.

Your home is real estate, but so is vacant land you might own and haven't improved on yet. Real estate can be a skyscraper in New York City, or a patch of unimproved desert land that can't be built upon.

How Real Estate Works

Real estate involves numerous facets, because it doesn't simply exist. It can segue from unimproved to improved. It can be purchased or sold. It might be owned by a government, by a corporate entity, or by a private party. But certain components can have a direct impact on the economy: consistent improvement of land, and the individual and entities that facilitate those transfers of ownership.

Construction of New Buildings

New home building is a critical category. It includes the construction of single-family homes, townhouses, and condominiums. The National Association of Home Builders (NAHB) provides monthly data on home sales and average prices. The data on new home sales is a leading economic indicator. It takes four months to establish a trend for new houses sold.

The NAHB also reports new home starts, the number of home construction projects on which ground is broken.

Real Estate Agents

Real estate agents assist individuals, businesses, and investors in buying and selling properties. The industry is typically divided up into specialties.

Sellers' or listing agents help find buyers through the Multiple Listing Service or their professional contacts. They price your property, using listings of recently sold homes known as "comparables" or "comps" because they're similar to yours. They can help you spruce up your property so it looks its best to potential buyers. They assist in negotiations with the buyer or the buyer's agent to get the highest price possible.

Buyers' agents provide similar services for the home purchaser. They know the local market, so they can find a property that meets your most important criteria. They also compare prices, a process that's referred to as "doing comps." This helps them guide you to areas that are affordable. Buyers' agents negotiate for you, pointing out reasons why the seller should accept a lower price. They can help with the legalities of the process, including title search, inspection, and financing. 

Real estate agents who want to increase their professionalism become REALTORS®.

Types of Real Estate

There are four types of real estate.

Residential Real Estate

Residential real estate includes both new construction and resale homes. The most common category is single-family homes, but there are also condominiums, co-ops, townhouses, duplexes, triple-deckers, quadplexes, high-value homes, multi-generational homes, and vacation homes.

Commercial Real Estate

Commercial real estate includes shopping centers and strip malls, medical buildings, educational buildings, hotels, and offices. Apartment buildings are often considered commercial, even though they're used for residences, because they're owned to produce income.

Industrial Real Estate

Industrial real estate includes manufacturing buildings and property, as well as warehouses. The buildings can be used for research, production, storage, and distribution of goods. Some buildings that distribute goods are considered to be commercial real estate. The classification is important because zoning, construction, and sales can be handled differently for this type of property.

Pieces of Land

Land includes vacant land, working farms, and ranches. The subcategories within vacant land include undeveloped, early development or reuse, subdivision and site assembly.

Investing in Real Estate

Anyone who buys or sells a home engages in real estate investing, and this means considering several factors. Will the house rise in value while you live in it? How will future interest rates and taxes affect you if you get a mortgage?   

Some people do so well investing in their own homes that they want to buy and sell homes as a business. You might flip a house, buying it to improve it then selling it. Many people own several homes and rent them out. Others use Airbnb or a similar service as a convenient way to rent out all or part of their homes.

Make sure you know where we are in the current business cycle before you invest.

You can also invest in housing without buying a home. You can buy stocks of homebuilders. Their stock prices rise and fall with the housing market. Another way is with Real Estate Investment Trusts, also called REITs. These are investments in commercial real estate. Their stock prices lag behind trends in residential real estate by a few years.

Reading the Real Estate Market

Statistics about new home construction are important leading economic indicators. They can give you a heads-up on the future of the housing market.

The chart below illustrates the number of new privately owned housing units started between 2000 and 2021.

Each of these indicators tells a slightly different story about the health of the homebuilding industry. For example, it would take a toll on home sales if home starts are steady, but housing starts to decline. Many buyers might not want to wait longer than a year. It also means that there's a shortage of lumber, concrete, or construction workers. Those shortages could drive up costs, and sales prices.

The homebuilder will end up with an inventory of unsold homes for sale if mortgages are declining. Demand is high, but homeowners can't get mortgages. Rising home starts might seem like an indicator of housing strength, but declining home closings mean the housing market is weak. 

Three other indicators are important to watch:

  • Inventory: The total of homes that are available for sale, but unsold, reported by the NAHB monthly
  • Months of supply: How many months it would take to sell all the houses in inventory based on the sales rate and inventory, also reported by the NAHB monthly
  • Sales prices: The median and average new home sales price as reported by the Census Bureau

The National Association of REALTORS® provides monthly reports on the number of homes resold and their average price. It's a better indicator of the health of the overall housing industry than new home construction because new home builders can be overenthusiastic about future sales. They can overbuild as a result or cut prices to force sales.

Defining a "New Home"

Constructing of a new home sale is the first step in a nine- to twelve-month process. Closings will rise in about a year if new home sales pick up, but the remaining three steps must be completed. The exceptions are spec homes that are used as model homes. The Census Bureau releases monthly estimates of new home sales. They're given as an annual rate.

A new home sale is when the buyer signs the paperwork and gives the homebuilder a deposit. Most new homes aren't constructed until there is a buyer.

Local housing regulators grant permits two months after the buyer goes to contract with the homebuilder. This is an early indicator, but it's not always accurate. Builders can go bankrupt and never build the permitted units. They can change the number of units to be built in a multi-family dwelling. In fact, 22.5% of multi-family permits aren't built, or they're changed to single-family units.

The new home start occurs when the builder breaks ground. The National Association of Home Builders reports on this monthly. It’s very accurate because the new home start only occurs when the builder is confident enough to break ground, but nothing is final until the home is sold and the deal closes.

  • Real estate is defined as land which might or might not have yet been improved upon by adding a structure or other improvements.
  • Statistics about new home construction can give you a heads-up on the future of the housing market for investing purposes.
  • The real estate market can be heavily dependent on the economy. Rising home starts can indicate a strong market, whereas declining home closings mean the housing market is weak.