ANALYSIS OF THE REAL ESTATE MARKET AND ITS LONG-RUN IMPACT ON ECONOMYSadaf Abbas
ANALYSIS OF THE REAL ESTATE MARKET AND ITS LONG-RUN IMPACT ON ECONOMY
Real Estate Market Size
Traditionally, real estate business refers to buying and selling residential, commercial, industrial and vacant real estate. The real estate market acts as a mediator between property owners and buyers. In 2023, the real estate market value reached $3976.18 billion from $3694.47 billion in 2022, with a compound annual growth rate of 7.6%. The market is estimated to grow to $5209.84 billion by 2027 with a CAGR of 7%. The real estate business can be segmented in three ways:
- Type: Real Estate Rental, Real Estate Agency, Real Estate Brokerage
- Property type: Fully furnished, Semi-furnished, Unfurnished
- Mode: Offline and Online
The third type of segmentation (by mode) is most significant because the online mode has expanded the market drastically. The primary objective of this research is to evaluate the changing norms of the real estate market and to forecast the impact of these new trends on the real estate market and the entire economy. Furthermore, we get the following data if we look into the U.S. real estate and brokerage sales over the past few years:
The Emergence of Real Estate on the Internet
Recently, the internet has brought numerous innovations to the real estate industry. Smart real estate is a term coined to describe a set of Internet of Things-driven real estate solutions. Basically, the Internet has widened the scope of the real estate market by providing its users with real-time data and limitless access to property listings. The Internet has, in short, increased access and shrunk costs for the real estate market.
Internet real estate platforms surfaced in 1999 in the U.S. Realtors report that 90% of home buyers used online resources to search for properties, while the percentage of consumers using Google to gather real estate information rose by 253% between 2008-2012. By 2013, the top real estate websites in the U.S. had started attracting 61-67 million visitors each month. According to research, 97% of home buyers use the Internet. Daily, 95% of realtors utilize email, while 57% use social media applications.
Supporting Tools of Online Real Estate
The significant attraction of the online real estate market for buyers and sellers is the amount of information that can be consolidated in one place. The buyers can easily view numerous listings per their preference at a click and without the hassle of going back and forth to a realtor. The sellers can also easily value their property by checking the market value of other similar properties. This way, the internet provides a faster solution to real estate-related problems.
The information also gets updated on a real-time basis. Real estate websites can offer extensive information depending on the specific website and its purpose. Among the information you may find on a real estate website are property listings, including the property type, location, price, size, bedrooms/bathrooms, and photos. You may also find market analysis, including data and trends on home prices, inventory levels, and days on the market.
In addition, some real estate websites provide tools and resources for mortgage and financing information, as well as real estate news and advice. Neighborhood and community information, such as schools, crime rates, public transportation, and local amenities, may also be available.
Many real estate websites offer virtual tours and videos of properties, allowing potential buyers to better understand the property’s layout and features. Lastly, real estate websites may feature profiles of agents and brokers detailing their experience, credentials, and areas of expertise. Overall, the amount of information available on real estate websites can vary significantly, but these are some of the most common types of information you can find.
Top Real-Estate Websites Worldwide
The top real-estate websites worldwide are shown below:
|Rank||Website||Avg. visit Duration (min)||Pages/ visit||Bounce Rate|
Online real estate platforms tend to form online social networks as well for information integration and marketing purposes. These online social networks are quite cost-effective in attracting a greater audience. Realtors use different social media platforms to find the most suitable buyers and sellers. According to a survey conducted by the National Association of Realtors, U.S., the percentage of realtors using the top three networks is shown in the chart below:
Online real estate platforms, be it websites or mobile applications, use complex artificial intelligence algorithms to match the most suitable buyers and sellers. The task a traditional realtor would complete in the span of months is accomplished by AI-assisted platforms in a few minutes. Hence, artificial intelligence has made the online real estate market much more efficient than traditional real estate business models.
A virtual real estate is an impressive tool that has become popular these days and is rapidly employed by all online real estate platforms. In 2022, the value of the real estate market was $ 27.96 billion, and it is expected to reach $ 252.16 billion in 2028. Virtual reality can be used in the real estate business in 5 different ways:
According to a report, 95% of the time, buyers call the realtor if they are provided with an online 3-D tour. It also allows the agents to increase the property price by almost 9%. Therefore, even if the costs of adopting virtual reality tools are high, they bring higher returns in the future for the agents and sellers and higher customer satisfaction as well.
The expansion of the online real estate market opened the opportunity for professionals to integrate blockchain technology. This technology can help with property tokenization, making operations efficient, reducing costs, and ownership fractionalization by broadening investor pools and increasing data accessibility. Following is the list of blockchain uses in the real estate industry:
|Uses of Blockchain in Real Estate|
|Asset Management and real estate Funds|
|Loan and mortgage scrutinization|
|Land & property registries, sales and reassignment|
|Property Development and Construction|
|Investor and tenant identity|
|Payments and leasing|
SWOT ANALYSIS: Comparing online and traditional real estate
The comparison between traditional and real estate businesses will show the possibility of success of each in the future. This comparison is essential because all traditional and online real estate companies have earned huge revenue over the past few years. It is forecasted to grow at a compounded annual growth rate of 4.8% in the coming years:
Strengths: Traditional Real Estate
The traditional real estate model is shown in the diagram below:
The strengths of the traditional model are explained below
- The buyers and sellers can perform the transaction with the help of expert advice.
- The agent/ broker also tries to provide their clients with a more professional and warm personalized experience as they understand the emotions attached to the sale.
- Real estate agents have enough experience and ample market knowledge to spot irritants.
- The agents also have superior negotiating skills, and the traditional model provides opportunities for negotiation.
- The agents/ brokers sometimes have access to off-market listings and have greater convincing skills.
- Real estate agents know undisclosed properties and are informed in advance by sellers with whom they have established strong connections. 89% of the home buyers said they would hire the same real estate agent or recommend them to the.
Strengths: Online Real Estate
The strengths of the online model are explained below:
- The biggest strength of an online real estate business is that the online platform provides access to a large audience. The chart below shows the number of visitors each month on the most popular real estate websites in the U.S.:
- Further, online real estate platforms connect buyers and sellers directly without any third party.
- The users must pay a small fee to use the platform rather than paying huge sums of commission to the agents/ brokers.
- The buyers can also get a wholesome experience through virtual tours.
- The online real estate experience is time efficient as thousands of listings are just a click away.
- It is more secure as agents now tend to protect paperless documents on cloud-based platforms due to privacy and theft issues.
- Real estate websites have built-in maps and can help trace the exact location of the properties.
- These platforms provide buyers with plenty of options to choose from.
- In addition, the online social platform can be effectively utilized by companies to expand their business.
- Online real estate platforms mostly use digital marketing platforms. In this way, they are not only able to reduce their costs, but they can also identify the most thriving channels and marketing campaigns. Based on the NAR’s Technology Survey for 2021, social media was ranked as the third most beneficial tool by 53% of realtors, with eSignature and local MLS apps taking the first two spots.
Weaknesses: Traditional Real Estate
The major weaknesses of the traditional model are explained below:
- The main weakness of the traditional real estate model is its time-consuming nature. On average, it takes almost four weeks before a sale is made through traditional real estate channels in the U.S. market.
- It is also more expensive because the agents or brokers charge a commission on the sale price. The commission fee varies between 4.5% to 6.34% in the U.S.; home sellers spent $17,654 on realtor fees on average in 2022.
- The access also becomes limited by opting for offline real estate methods.
- Finally, there is always a chance of fraud when choosing a new agent/ broker. In 2022, the FBI reported that over 13,600 individuals fell prey to real estate or rental fraud.
Weaknesses: Online Real Estate
The weaknesses of the online model are explained below:
- It fails to meet the specific needs of the sellers and buyers. The artificial intelligence algorithms fed in the back end are still not smart enough to identify the special requirements of the real estate clients, and most people cannot phrase these requirements in the listings themselves.
- One other feature that online real estate platforms lack is the expertise experienced professionals offer. Due to this lack of expertise, the problem areas remain hidden in online real estate transactions, and the buyers and sellers cannot comprehend many technicalities involved in the sale.
- The off-market listings are not available on online portals, limiting their access to all properties available for sale.
- Although portals can provide users with a property’s basic information, they cannot provide the level of detail on its physical characteristics that home buyers often need. Therefore, most homebuyers will still need to enlist the services of professional real estate agents to evaluate the conditions of the house.
- The real estate websites match property sellers and buyers; these platforms do not assist in negotiations.
- Fraud or identity theft is always possible online because not every document can be verified authentically.
- Many online portals also prove inefficient due to their inability to keep up with incoming mail and messages. The clients may become frustrated due to the absence of proper attention.
Opportunities: Traditional Real Estate
The opportunities for the traditional model are explained below:
- The agents who care for their client’s needs and are determined to find the right property have the edge over the real estate websites. Hence, traditional real estate brokers and agents can still find opportunities if they can identify the weaknesses of online portals.
- Due to increased property fraud, buyers and sellers are becoming skeptical of online transactions, opening more opportunities for traditional mediators.
- According to a survey by the National Association of Realtors, U.S., 86% of respondents agreed that their real estate agents were beneficial in information provision.
- The companies/ agents working on the traditional real estate model have opportunities for growth if they offer the following services:
Opportunities: Online Real Estate
The opportunities for the online model are explained below:
- The time-saving characteristic of online real estate platforms and their access to unlimited real-time data gives them a competitive edge over traditional real estate models. Almost 47% of home buyers in the U.S. tend to start their search online, and around 96% of all buyers use online tools to search for a new property.
- According to a report, people have become more comfortable with digitalizing the real estate market post-pandemic, as many bought their houses without stepping inside in 2020. Although the buyers were reluctant to trust huge online purchases, online real estate provided them with a pandemic-friendly alternative. There has been a 23% increase in searches for virtual staging over the past five years. The number of searches on Zillow, the most popular online real estate platform in the U.S., increased by 51% in the last 5 years.
- Finally, the biggest opportunity for online real estate is the recent inclusion of online mortgage options. The searches for Better Mortgage, an online mortgage lender, increased by 46% from 2013-2021.
Threats: Traditional Real Estate
The threats to the traditional model are explained below:
- A number of innovations introduced by online real estate platforms represent the major threat to the traditional real estate model. The online real estate model is more in line with the rapid digitization of operations in the modern world.
- Over the past few years, people have become more accustomed to online marketplaces such as e-commerce websites, which have also added to the adaptability of the online real estate market.
- The expansion of the e-commerce market has also made people more accepting of the online real estate market; this has threatened all offline real estate agents and brokers. In 2021, 30% of the real estate sales shifted from the physical to the online market in the U.K. alone.
Threats: Online Real Estate
The threats to the online model are explained below
- Like any other online business, the biggest threat to online real estate platforms is the threat to data privacy. Online real estate platforms have immense data; this includes sensitive and private data of property buyers and sellers who have shared the information of their assets. Online real estate platforms always face the threats of cyberattacks in the form of
- Business Email Compromise (BEC)
- Data Loss and Breaches
These threats can be mitigated through resilient planning, cyber training programs and regular cyber security auditing.
The above-mentioned SWOT analysis has presented a comprehensive summary of the differences between traditional and online real estate. This differentiation aimed to understand the changing trends and their impact on the real estate market.
Labor and property are the two main revenue streams of any country’s gross domestic product (GDP). The global real estate markets greatly impact the economy due to immense revenue generation. Previously, we have looked into the traditional and online real estate markets separately to understand the changing nature of real estate and the emerging trends in this business. The five largest real estate markets, based on revenue, in the world are:
Global Real Estate Markets by Revenue
|Country||Revenue US$ (2023)*|
Our research aims to understand the real estate market as a whole. This research is mainly conducted on data from the U.S. real estate market, as the relative weight of the U.S. was reported to be 41.6% in the MSCI Annual Property Index. The total revenue from real estate in the U.S. is expected to reach $395.40 billion in 2023, with an expected annual growth rate of 2.15% from 2022-2023. This means that the real estate market is now recovering after the economic downturn of the pandemic in 2019 though it is still impacted by the Russia-Ukraine war.
In order to provide concrete data and its analysis to the readers, detailed quantitative research was also conducted on the U.S. real estate market. The following graph has been prepared to show the size of the U.S. real estate industry:
After comprehensively understanding the real estate industry and its dynamics, the research has been executed to evaluate the real estate industry’s impact on the economy of the US. The time series analysis has been performed, and data is extracted from FRED (Federal Reserve Economic Data) website. The analysis has been performed on the data for 5 years, from 2017-2021, on a quarterly basis.
The dependent variable involved in the study is the RGDP (Real Gross Domestic Product), and the independent variables are MLP (Median Listing Price per Square Feet) and REL (Real Estate Loans) of all commercial banks in the US.
Next, the ADF (Augmented Dickey-Fuller) test was performed to determine the unit root to choose the most suitable model. The last ARDL (Autoregressive Distributed Lag) model was applied to evaluate the long-run impact of the independent variables on the country’s GDP.
The analysis was done based on the following model:
log(RGDP) = a + B1*log(MLP) + B2*log(REL) + u
Basically, a log-log regression model was chosen to eliminate the differences between the units of the values.
Results and Findings
The following table shows some of the descriptive statistics of these three variables for the 5-year data:
|Sum Sq. Dev.||7,703,586||9,484||700,765|
The null hypothesis of the Jarque-Bera test is that the data is normally distributed. The results show that the probability value of all variables is greater than 0.05; hence we retain the null hypothesis for all variables.
Unit Root Test
The ADF test was conducted on level series, first difference and second difference. The significance was checked on 1%, 5% and 10% levels.
(a) ADF test for unit root on the level series:
(b) ADF test for unit root on the first difference
(c) ADF test for unit root on the Second difference
NS= Not Significant
* Significance at 1%
** Significance at 5%
*** Significance at 10%
Finally, the correlation between the dependent and independent variables was found to be as follows:
The above table shows that there is a 74.1% positive correlation between the RGDP (Real Gross Domestic Product) and the MLP (Median Listing Price per Square Feet) and a 62.5% positive correlation between the RGDP (Real Gross Domestic Product) and the REL (Real Estate Loans) of all commercial banks in the U.S.
ARDL Long Run Form and Bounds Test
Dependent Variable: GDP
Bound Test shows that the F-stats value (69.5) is greater than the value of the upper bound, which indicates there is a cointegration between the variables.
Whereas the probability value of Real Estate Loans (REL) is not significant, which means it has no impact on the RGDP. However, the Median Listing Prices (MLP) were found to affect the GDP at a 10% significance level. Hence, it was deduced that at a 10% significance level, a 1% increase in MLP will increase the RGDP by 105% in the long run.
The real estate industry is one of the largest contributors to the GDP worldwide. The results and findings evaluate the impact of the real estate market’s funding and listing prices on the GDP. The time series analysis showed that the real estate listing prices would positively impact the GDP. Additionally, thorough research was completed to comprehend the changing trends in real estate. It was found that technology has played a major role in revolutionizing the real estate business globally.
Online real estate platforms have emerged in recent years with innovative business models and AI-integrated solutions to aid sellers and buyers of properties. In the future, the real estate market is expected to expand immensely and online platforms are expected to provide their users with safer, more efficient and contactless services. So it’s essential for real estate companies, agents and brokers to rapidly move towards technological advancement and modernization and to flow with the trend.
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