History of Real Estate

It is impossible to know when the first real estate transaction took place. Perhaps someone offered his seat to someone else in exchange for a morsel of food. One can only speculate. There have been several ideas and technologies that have advanced the practice of real estate throughout the years. Complex tools like mortgage securitization now have an outsized influence on our economy, but such tools are built out of some simple traditions that carry on to this day.

A title, in modern parlance, is a document that shows proof of ownership of a piece of real property. It confers on the owner a set of rights and responsibilities regarding the property. When you buy a house and the deal closes, the previous owner gives you the title. In the distant past, kings owned entire countries by divine right. They conferred titles, such as lord or duke, on favored nobles in exchange for their allegiance and military aid. These titles came with hereditary holdings of real property, land, manors, and the peasant labor that occurred therein. Titles have since transformed into legal documents, but the idea behind a title remains the same. Deeds are similar to titles, but may confer less than full ownership to its holder. These terms (title, deed) are thousands of years old. When you buy a piece of property, you become lord of the manor in more than just a manner of speaking.

A mortgage is a unique loan product, designed specifically for real estate. The loan is based on collateral represented by a piece of property. A mortgage is essentially a loan that must be paid back in a set number of payments in a set amount of time. For example, a 30-year mortgage might have 360 monthly payments, each one the same amount, from the first to the last. As each month passes, the amount of interest paid decreases while the amount of principal paid increases. There are adjustable rate mortgages and pre-payment plans, but the idea of the mortgage as a fixed agreement remains. Failure to meet even one of the agreed upon payments can give the lender the right to evict the borrower and foreclose on the property. Nowadays, it is the rare individual who can afford such a large investment without a mortgage.

Mortgages have been around since at least the 15th century, when the word was coined. The idea probably predates the word. Mortgages used to be reserved for nobility who would use the proceeds from their land to keep the land in their family. Mortgage lending began on a much wider scale in the middle of the 19th century, after the Industrial Revolution democratized wealth to a great degree. Lenders began offering mortgages, making land ownership much more widely available to the average person. In the United States, government guaranteed loans, and developers such as William Levitt made home ownership synonymous with prosperity following the Great Depression.

Securitization is the process by which lenders collect many loans into a single financial product. They then sell off percentages of this product to different buyers. This aggregation of risk (a single homeowner might default on a loan, but the other loans in the product support its value) seemed to insure against the possibility that loans were risky investments. The opposite has proven to be the case. When low interest rates and loosened regulation led to a housing bubble in recent years, these securitized pools of loans threatened the world economy. Although securitization continues, increased regulation could decrease the possibility of bubbles in real estate markets in the future. It might not succeed. What does remain clear is that real estate continues to be the preferred investment for families to hold and increase their wealth. The future looks safe for real estate.

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