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Chapter 5 Residential Market Analysis

Chapter 5 Residential Market Analysis. Major Topics. Demand drivers for home ownership Drivers of long and short term owner occupied housing market The decision to buy or rent The cost of home ownership Calculating what you can afford

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Chapter 5 Residential Market Analysis

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  1. Chapter 5Residential Market Analysis

  2. Major Topics • Demand drivers for home ownership • Drivers of long and short term owner occupied housing market • The decision to buy or rent • The cost of home ownership • Calculating what you can afford • How the government supports mortgage lending and discourages discrimination • Age and ownership • Simple models of multifamily housing analysis • The dynamics of rental housing market • Trends in residential housing

  3. Introduction • Residential structures account for 24% of value of all assets owned in U.S. • Each generation desires bigger and better homes • Average new housing is 25% bigger than what it was fifty years ago • Home ownership rate has been rising steadily • 64% in 1990 to 68% in 2002

  4. Is Home Ownership a Right? • Home ownership is thought to provide not only shelter and comfort but also some degree of financial security, and in some cases significant investment returns as well • In a capitalistic system, no one has a “right to home ownership”, but safe and healthy housing for all citizens is considered a national priority – much like full employment

  5. Long Term Demand for Housing • Demand for housing is a function of: • Household growth rate • General economic productivity • Indicators of housing demand: • Population • Household sizes

  6. Long Term Demand for Housing (Contd.) • What influences Household Size? • People are living longer – more of life spent without children at home • Women outlive men – more widowed single households • People are having fewer children • More women participating in the workforce • Divorce rate in the U.S. has been steadily rising

  7. Regional Demand for Housing Factors leading to absolute and relative growth in the number of households: • Size of existing population • Job Growth (especially within export sector) • Overall Quality of Life

  8. Short Term Demand for Housing • Dominant factors for short term demand: • Mortgage interest rates • Seasonality (climate, schools, holidays)

  9. The Buying vs. Renting Decision Economic Factors • Capital constraints • Expected tenure • Income tax rate • Tax laws for capital gains • Mortgage rates & Financing programs • Investment aspects (expected appreciation) • Budgeting risk

  10. The Buying vs. Renting Decision (Contd.) Psychological Factors • Control over housing unit (design, appearance) • Long term housing aspirations • Ego satisfaction and utility of ownership

  11. How Much Home can one Afford? • Sources of capital : Equity or Debt • The before tax costs of owning a home include: • Mortgage payments (most significant) • Property taxes • Property insurance • Utilities • Maintenance

  12. Federal Government Assistance • VA • FHA • GNMA • FHLMC

  13. Housing Products and Demand Segments Product Segmentation • Single family detached • Single family attached (usually condominium) • Manufactured housing • Mobile homes

  14. Analysis of Housing Market: Demand • Simple Population and Household Trending • Estimating demand based on employment growth

  15. Analysis of Housing Market: Supply Developer Monitoring • Estimating the supply coming online is very difficult due to large number of developers of varying sizes • It is very easy to supply too much housing and the housing market tends to move in cycles

  16. The Integrated Development Model:Short Term Modeling of Demand & Supply • Apart from aggregate market analysis, developers use a simple model: • “Keep building units as long as they sell or rent” • Short term indicators are: • Occupancy rates (conversely vacancy rates) • Waiting lists • Recent rental growth rates

  17. Housing Market Dynamics:Searching for Equilibriums • Supply and Demand are bought together by “price” • Economic principles to understand housing markets

  18. Patterns of Possible Rental Housing Market Changes • Two general processes which bring a market back to long run equilibrium after a change in demand or supply: • Demand increases or supply is reduced • Demand is reduced or supply increases beyond equilibrium levels

  19. Demand Increase or Supply Reduction D2 S1 Rent S2 D1 1st 2nd Supply Q1 Q2

  20. Supply Over-shoots Demand S1 1st Rent S2 D1 2nd 1st 2nd Supply Q1 And Q3 Q2

  21. Senior Housing Options Seniors’ location preference: • Warmer Climate • Low income tax • Close to prior housing location Senior Housing Options: • Active Adult Community Independent Living Housing • Congregate Housing with Assistance • Congregate Housing with Assistance and Nursing • Skilled Nursing Homes • Alzheimer’s Specialized Care Centers • Hospice Centers

  22. Trends in Housing Market • New economy has increased the population of mobile workers • Mobile worker travels frequently and more wealth and higher income • More and more households own second homes today • If this trends continue people will have three or four homes strategically located for business or pleasure • Internet has put pressure on brokerage costs and this may result in increased buy and sell transactions • Senior population has increased much faster and housing suiting their needs will have good demand • A permanent renter market is also becoming more common • Apartments are getting bigger and better

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