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Chapter 7

Chapter 7. House prices (p183-4). US industry data indicate that first-time home-buyers are generally 28-32 years old those home-buyers tend to sell the first home and buy an upgrade by age 40 consumers buying a vacation property or 2 nd home tend to make the purchase by age 48-52

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Chapter 7

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  1. Chapter 7

  2. House prices (p183-4) • US industry data indicate that • first-time home-buyers are generally 28-32 years old • those home-buyers tend to sell the first home and buy an upgrade by age 40 • consumers buying a vacation property or 2nd home tend to make the purchase by age 48-52 • retirement homes are considered no earlier than age 60

  3. What is the word that statistics experts (“statisticians”) use for information such as what we read on the previous slide? Take 2 minutes and come up with the word.

  4. Income vsprices (p185) • “The relative desirability of regions that attract businesses • (1) affects the ability of households to earn income that they use to acquire housing and • (2) also affects housing prices.” GOOD HOUSING PRICES GOOD LOCATION GOOD BUSINESSES GOOD WAGES

  5. Page 184 Slide 7-1 Economic Influences on Housing Demand Increase inDirection of Impact on Demand • Population growth + • Household formations + • Employment + • Household income + • Interest rates - • Federal income tax rates - • Cost of renting housing +

  6. Renting versus Owning and the effect on the demand for housing When is renting a wiser choice than owning? When your capital will grow faster in other investments AND if that capital will buy more when and if you decide it is time to buy. Costs associated with renting and owning

  7. Renting: rent, security deposit (tied up equity), utilities (water, gas, electricity). No appreciation. Owning: Down payment, mortgage payments, insurance(s), utilities, maintenance, capital repairs and upgrades, . Appreciation = growth in sale price less costs associated with selling. Roofing Shingles: 25 years. 10,000 Furnace: 15 years 7,000 Water Heater: 10-12 years. 1,500 Windows: 20 years 10,000 Driveway: 25 years 15,000 Brick mortar: 50 years 10,000 Foundation: 50 – 75 years 20,000 Central Air Conditioning: 10 years 7,000 Paint and caulking: 5 years 1,000 Historical Trends 67% of housing in the USA is owned. 33% of housing in the USA is rented.

  8. Demographics 30 years $9K equity 40 years $52K equity interest rates high interest rates low

  9. Location Population density GOOD HOUSING PRICES GOOD LOCATION GOOD BUSINESSES GOOD WAGES The dark blue indicates greater population density on the East Coast

  10. What makes a location desirable? FOR BUSINESSES FOR WORKERS Cost of available labour EXPECTATIONS Average wages Housing prices Industrial property values Quality of schools Varies considerably in the USA

  11. Silicon Valley vs State of Arkansas

  12. Silicon Valley vs State of Arkansas

  13. Inner Mongolia, ORDOS • A new housing project in KANGBASHI district was constructed where the cost of living is HIGH • housing prices crashed by 62% in a few months (China Daily)

  14. Demographics, ORDOS WHAT WENT WRONG ?

  15. Inner Mongolia, ORDOS

  16. Inner Mongolia, ORDOS

  17. Inner Mongolia, ORDOS

  18. Interest rates (p185) • Factors affecting interest rates: • supply and demand for loanable funds • Federal Reserve monetary policy • Mortgages tend to be loans with high loan-to-value ratio (LVR) so a change in interest rates affects monthly payments significantly • Therefore, the Federal Reserve has a strong effect on housing demand

  19. Interest rates (p185) • In general, • increases in interest rates cause decreases in housing demand • decreases in interest rates cause increases in housing demand • Other factors affecting demand are available mortgage options, such as • adjustable rate mortgages (ARM) • different loan amortization options • no-penalty prepayment options

  20. Interest rates (p185) • “… during periods of appreciating house prices and/or low interest rates, lenders may tend to be more flexible on such things as credit scores when underwriting. This tends to amplify the effect that interest rates otherwise may have on housing demand.” • Is this prudent or imprudent lender behaviour?

  21. Historical trends (p190) • approximately 67% of all residential housing is owned • this suggests that home ownership is a good investment • lower income borrowers must compare the rights and costs of tenants vsowners • rights of ownership REVIEW from • rights of possession only Review from CH 1 and 2

  22. In-class Reading Assignment Read this summary from Concept Box 7.1 and write your opinion in your notebook. Mr. Silver will ask for students to read their summaries. The term bubble is used to describe an extraordinary market condition in which house buyers and speculators cause prices to increase to levels that cannot be sustained. Bubbles tend to ‘burst’ when it is realized that underlying economic factors do not justify the prices being paid for houses. During the recession of 2001 – 2002, the Federal Reserve adopted a low interest rate policy to provide a stimulus for economic recovery. Some interest rates, including mortgage interest rates, reached 40 year lows. Builders and condominium converters were interested in selling their product as quickly as possible to anyone who could qualify for financing. Speculators were willing to take the risk of purchasing units and borrowing at very high loan-to-value ratios to eventually “flip” or sell, them to others. As long as the lenders provided financing at low interest rates, this tended to stimulate demand and added to price escalation. Increased use of ARM (adjustable rate mortgages) financing also made initial mortgage payments very low and tended to reinforce this speculative activity. Lenders remained willing to accommodate this process because they earned fees and interest on loans made to builders, condo converters, speculators, and ultimately, the final homeowner.

  23. Summary of previous slide • Buyer beware. • If something seems to good to be true, it probably is. But , if you understand the economic situation and you are willing to take the risk, you could earn a profit. • Consumers must be aware of the dangers in quick profits.

  24. Analyzing prices (p194) • We can think of appreciation in equity as unrealized equity gains. What does this mean? • These gains would only be realized if • the home-owner sells the property • the home-owner re-finances the property • The “wealth effect” is the increase in consumer spending overall that results from the expected appreciation in assets and home equity

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