Real Estate Economics

Real Estate Economics Chapter 15 Review of the Course

1. R E Econ is a social science that studies international, national, regional, city & neighborhood trends in an effort to interpret what effect these trends will have on real estate values. • 2. Every country must answer: What shall be produced? How? For Whom? • 3. Basic principles of pure capitalism include: private property, private enterprise, competitive markets, profit motive, laissez-faire. • 4. The U. S. has “mixed” capitalism. Session One: Introduction

1. Four factors of production: land, labor, capital and management. • 2. Rents, wages, interest & profits are influenced by the interaction of supply & demand. • 3. Gross domestic product (GDP) is the total value of goods & services produced domestically in a given period (one year). • 4. The U.S. economy is a circular flow (business buys resources from individuals & pays income. Individual take income & purchase goods & services from business). • 5. Foreign investment (imports & exports) have expanding role in the U. S. economy. Session Two: Basic Economic Principles

1. Business cycles are intermediate movements in major economic activities. • 2. The phases of a business cycle are: prosperity, recession, depression & recovery. • 3. The federal government uses fiscal & monetary tools to remove excessive swings in the business cycle. • 4. Real estate activity cycles are more pronounced than business cycles & caused by shifts in loan availability, business and consumer confidence. Session Three: Business & Real Estate Cycles

1. Money is a medium of exchange, a measure of value, a store of value & a standard of deferred payment. Money supply consists of coins, paper currency & demand deposits. • 2. The Federal Reserve controls the supply of money & credit to stabilize the economy & uses open-market operations, discount rates & reserve requirements. • 3. When the Fed Res fights inflation via tight money policies, the housing industry is the hardest hit. • 4. Disintermediation occurs during tight money periods, caused by a marked slow-down in all real estate activity. DeReg & ARM loans reduced disintermediation. Session Four: Money, Credit, and Real Estate Activity

1. Regional & community economic activity is more important to local real estate markets than national or international. • 2. An increase or decrease in the economic base has a tremendous impact on real estate values. • 3. Economic Base Studies & Input-Output Analysis are methods used to study regional & community economic conditions. Session Five: Regional & Community Economic Development

1. Early cities were formed for defense or religious reasons; Later for commercial & manufacturing. • 2. Cities classified by functionally: industrial, commercial, political, resort. Cities grow or decline due to economic, social & political forces. • 3. City growth pattern models/theories: concentric circle, central & axial, sector & multiple nuclei. • 4. Each city is comprised of a series of neighborhoods. Real estate values within a city are greatly influenced by the condition of the surrounding neighborhood. Session Six: Community & Neighborhood Growth Patterns

1. Real estate markets are imperfect: buyers & sellers are NOT numerous; the product is heterogeneous, bulky & expensive; buyers & sellers are NOT knowledgeable about the complexities. • 2. Short run: The supply of real estate is fixed. Demand causes change in prices. • 3. Demand factors: population, income, cost, credit, taste, and customs. • 4. Supply factors: rate of new construction, conversions, demolitions & losses due to destruction. • 5. The real estate professional is to help overcome the imperfections with knowledge & expertise for consumers. Session Seven: Residential Real Estate Markets

1. Demand for business real estate is tied closely to the phases of the business cycle; depends on the rate of new construction, conversions, demolitions & destructions. • 2. Accessibility & linkage are two locational factors sought by industrial & commercial real estate users. • 3. Recent trends include a decline in major retain stores in central business district (CBD). Planning agencies are attempting to limit expansion of commercial strip development. Industrial parks are promoted. Foreign investment changes with the global economy. • 4. Rural markets consist of agricultural, recreational, rural living & resources. • 5. The general real estate broker has declined as increased specialists increase: industrial, commercial, farm, etc. Session Eight: Business & Rural Real Estate Markets

1. Taxation redistributes goods & services from the private sector to the public sector. • 2. Taxation based on ability to pay: progressive (income tax) , proportional (sales tax) or regressive (property tax). • 3. Property taxes influence real estate values & direct land usage. • 4. Real property tax reform would be the burden on the middle- and lower-income persons. Session Nine: Economic Impact of Real Property Taxes

1. Land use controversy centers on (1) scarcity of usable land, & (2) the public is beginning to view land as a resource, instead of a commodity. • 2. Economic highest & best use and private deed restrictions were the earliest forms of land use controls. Then came zoning, local planning. Then state & national land controls. • 3. The amount of government controls & required reports has increased the cost of development & caused time delays. • 4. The trend is for more controls on private land to protect general public interests. Session Ten: Land Use Controls

1. Investing requires giving up present consumption in exchange for future benefits. • 2. Yield, tax advantages, growth, risk, leverage, management & liquidity are basic economic factors to analyze when comparing various investments. • 3. Tax advantages for homeownership: deduct interest, property taxes & capital gains tax exemptions. • 4. Tax advantages for investors: deduct interest, property taxes, operating expenses & depreciation. 1031 exchange & installment sale. Passive loss treatment discouraged real estate investors. • 5. Depreciation is a “non-cash” deduction that increases ta savings & enhances the rate of return. Session Eleven: Investments: Part I - Principles of R E Invesment Analysis & Income Tax Aspects

1. Investment analysis concentrates on cash flow, rate of return, income tax advantages & estimated market value at time of sale or exchange. • 2. Analysis steps: (1) compute current year, after tax cash flow, (2) forecast future years after tax cash flow, (3) forecast net sale proceeds at resale, & (4) convert all estimated figures into a rate of return. • 3. Performance indicators: gross rent multiplier, cap rate, cash-on-cash rate, equity yield rate & discounted analysis solving for internal rate of return. Session Twelve: Real Estate Investments, Part II: How to Analyze Cash Flows & Compute Rates of Return

1. The steps in the scientific method of analysis • 2. The steps in analyzing an improved property • 3. The steps in analyzing the alternatives for unimproved parcels. Session Thirteen: Applied R E Economics

1. The future has changes for real estate. Developments will provide social & economic justifications. • 2. The industry is shifting from a vocation to a profession. Licensees will need more time planning & consulting and less time actually selling. • 3. Real estate interests combine forces for both private and public interests to represent policy changes. Session Fourteen: Challenge of the Future

Real Estate Economics