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Real Estate Economics

Real Estate Economics. Real Estate 165 Allan J. Lacayo. Economic Preliminaries. The Competitive Model Many homogeneous buyers/sellers Product homogeneity High transaction volume Elastic supply and demand Space/location unimportant Perfect/complete information. Real Estate:

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Real Estate Economics

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  1. Real Estate Economics Real Estate 165 Allan J. Lacayo

  2. Economic Preliminaries • The Competitive Model • Many homogeneous buyers/sellers • Product homogeneity • High transaction volume • Elastic supply and demand • Space/location unimportant • Perfect/complete information • Real Estate: • Many heterogeneous buyers/sellers • Product Heterogeneity • Irregular transaction volume • Inelastic supply and demand • Space/location are very important • Information is less than perfect or complete

  3. Real Estate Characteristics • Uniqueness of each good/property • Fixed location • Interdependence of Land Uses • Land is “long-lived” • Fixtures are “long-lived” • “Ownership” is “long-lived” • Large transaction prices, and high transaction costs • Long “gestation” period

  4. Real Estate Assumptions • “Highest and Best Use” principle • Uncertainty and the “Second Best” principle

  5. Highest and Best Use • Physically practical • Legally permissible • Market supportable • Economically feasible • Profit Maximizing

  6. Second Best Theory • Interim projects serve as a moratorium on HBU to mitigate non-market, non-economic forces. • Adaptive projects preserve historical landmarks or assimilate environmental or natural features.

  7. Development Expansion Redevelopment Improvements Maintenance Changes to STOCK of real property by use UsePrinciples The Urban Evolution process

  8. Supply and Changes in Supply • Space is fixed in the short run • Supply changes (development/construction) are small in relation to stock • Supply of property services is more elastic • “Expectations” about demand drive supply • Real estate development suffers an “acceleration’ effect • Financing process is critical for supply

  9. Demand and Changes in Demand • Employment (state/regional/local) • Income • Shifts in industrial/economic focus • Migration and other population shifts • Technology changes • Work culture and leisure culture

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