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Title: Influences on


1
Chapter 8
  • Influences on
  • Real Estate Values

2
Chapter 8 Objectives
  • After completing this chapter, students will be
    able to
  • Identify the differences between the four broad
    forces and how these forces and perceptions
    affect the value of real estate

3
Key Terms
  • Asbestos
  • Clean Air Act
  • Clean Water Act
  • Comprehensive Environmental Response,
    Compensation, and Liability Act (CERCLA)
  • Electromagnetic Fields (EMFs)
  • Environmental Hazard
  • Environmental Protection Agency (EPA)

4
Key Terms
cont.
  • External Environmental Hazards
  • External Obsolescence
  • Internal Environmental Hazards
  • Lead-Based Paint Hazard Reduction Act (Title X)
  • Linkages
  • Methamphetamine
  • Mold
  • National Environmental Policy Act (NEPA)
  • Nuisance
  • Radon

5
Key Terms
cont.
  • Stigmatized Property
  • Underground Storage Tanks (USTs)
  • Urea-Formaldehyde
  • Urea-Formaldehyde Foam Insulation (UFFI)
  • Wetlands
  • Resource Conservation and Recovery Act (RCRA)
  • Safe Drinking Water Act (SDWA)
  • Sick Building Syndrome

6
Four Forces InfluencingReal Estate Values
  • PEGS
  • Physical forces
  • Economic forces
  • Governmental forces
  • Social forces

7
Physical Forces
  • May also be referred to as environmental and
    geographic forces
  • May include conditions
  • On a property (specific)
  • External to the property (broad)

8
(Physical)Environmental Forces
  • Many are controlled at the federal level through
    federal laws and regulations
  • Other environmental issues are controlled at the
    state or local level
  • Certain inspections and/or disclosures may be
    required

9
Environmental Protectionat the Federal Level
  • National Environmental Policy Act (NEPA)
  • Environmental Protection Agency (EPA)
  • Clean Air Act (CAA)
  • Clean Water Act (CWA)
  • Comprehensive Environmental Response,
    Compensation, and Liability Act (CERCLA)
  • Superfund Amendments and Reauthorization Act
    (SARA)Resource Conservation and Recovery Act
    (RCRA)
  • Safe Drinking Water Act (SDWA)

10
EnvironmentalProtectionWetlands
  • Ecosystems where the land is permeated with
    water, and are commonly referred to as swamps,
    bogs, and marshes
  • Protected under the federal Clean Water Act
  • Enforced by the U.S. Army Corps of Engineers
  • Some activities are prohibited and require a
    permit if they could permanently change or
    destroy the wetland habitat

11
Environmental ProtectionProperty Hazards
  • Internal and external hazards
  • Nuisance Anything emitting from the outside of
    the property that interferes with the owners
    right of quiet enjoyment
  • If a nuisance is permanent, it is an external
    obsolescence
  • Environmental hazard A situation that exists
    with potential for harm to persons or property
    from conditions that exist outside or within a
    property

12
CommonEnvironmental Hazards
  • Asbestos
  • Electromagnetic fields (EMFs)
  • Lead
  • Methamphetamine
  • Poor air quality (sick building syndrome)
  • Underground storage tanks (USTs)
  • Urea-formaldehyde
  • Mold
  • Radon

13
(Physical) Geographic Forces
  • Characteristics related to the environment
    surrounding the property that either can
    contribute or detract from value
  • Topography
  • Soil conditions
  • Water
  • Location and view (linkages)
  • Climate
  • Natural features and barriers

14
Work Problem
  • What are some uses or locations where various
    types of natural features and barriers can either
    be a benefit or a hindrance to property value?

Possible examples include (but are not limited
to) Ski slopes Mountain resorts Waterfront
businesses and housing sites Nature
preservations and resorts
15
Economic Forces
  • World events
  • Energy costs
  • War
  • Terrorist activities
  • Cost and availability of credit
  • Employment levels
  • Availability of employment
  • Earnings levels
  • Taxes
  • Inflation

16
Government Forces
  • Government services
  • Revenue generating law (right of taxation)
  • Right to regulate laws (police power)
  • Governmental fiscal and monetary policies
  • Secondary mortgage markets and government
    mortgage programs

17
Social Forces
  • Demographic changes
  • Migrations of the population
  • Social trends
  • Buyers tastes and standards

18
Stigmatized Properties
  • Properties held to be undesirable by most people
    because of a past event or condition
  • Crime, murder, suicide, drug activity, past
    environmental hazards (methamphetamine, fire,
    chemical spill)
  • Determining value influence can be time intensive
    and require significant knowledge of market
    reaction
  • Being objective is ultimately important

19
Chapter 8 Quiz
  • 1. Radon gas
  • can indicate the presence of a toxic uranium dump
    close to the property.
  • can present a problem indoors if allowed to build
    up to dangerous levels.
  • is a man-made waste byproduct.
  • makes a house worthless because it must be
    condemned by the EPA.

20
Chapter 8 Quiz
  • 2. What statement about electromagnetic fields is
    FALSE?
  • They are created by moving electrical currents.
  • They can affect other charged objects.
  • They can be produced by high-tension power lines.
  • They have been proven to cause cancer.

21
Chapter 8 Quiz
  • 3. It is well known that a murder took place in a
    house 40 years ago. This could be an example of
  • an internal obsolescence.
  • neighborhood decline.
  • a stigmatism.
  • social force.

22
Chapter 8 Quiz
  • 4. A trend of moving to a new suburban area is an
    example of
  • economic forces
  • locational forces
  • physical forces
  • social forces

23
Chapter 8 Quiz
  • 5. The states housing finance authority has just
    issued a low-interest, first-time homebuyer
    mortgage program. Sales are spurred as a result
    of this
  • governmental force.
  • physical force.
  • social force.
  • supply and demand.

24
Chapter 8 Quiz
  • 6. Which is an example of the governmental force
    of revenue generating laws?
  • cost of credit
  • earnings levels
  • permissibility of zoning
  • specific tax policies

25
Chapter 8 Quiz
  • 7. Wetlands are protected under what federal Act?
  • Clean Water Act
  • Federal Wetlands Protection and Wildlife Act
  • SARA
  • U.S. Army Corps Act

26
Chapter 8 Quiz
  • 8. Sick building syndrome is a result of
  • a former traumatic act.
  • inadequate soil composition.
  • linkages to toxic waste dumps.
  • poor air quality.

27
Chapter 8 Quiz
  • 9. The Comprehensive Environmental Response,
    Compensation, and Liability Act primarily
    addresses
  • abandoned waste sites.
  • air quality in public buildings.
  • properties ridden with mold.
  • safe drinking water.

28
Chapter 8 Quiz
  • 10. Which is an example of linkages?
  • estimated driving time from populated areas to
    major interstate highways
  • known relationship of environmental concerns and
    terminal illness
  • proximity of hazardous substances to populated
    areas
  • relationship of household members when analyzing
    social forces

29
Chapter 9
  • Economic Principles
  • and Applications

30
Chapter 9 Objectives
  • After completing this chapter, students will be
    able to
  • Apply economic principles when forming value
    opinions

31
Key Terms
  • Amenity
  • Anticipation
  • Balance
  • Buyers Market
  • Change
  • Competition
  • Conformity
  • Contribution
  • Excess Land
  • Four Agents of Production
  • Highest and Best Use
  • Interim Use
  • Law of Diminishing Returns
  • Law of Increasing Returns
  • Market Equilibrium

32
Key Terms
cont.
  • Market-Use Property
  • Opportunity Cost
  • Principle of Consistent Use
  • Progression
  • Regression
  • Sellers Market
  • Single-Use Property
  • Special-Use Property
  • Substitution
  • Supply and Demand
  • Surplus Land
  • Surplus Productivity

33
Four Agents of Production
  • C E L L
  • Capital
  • Entrepreneurship
  • Land
  • Labor

34
FundamentalEconomic Principles
  • Anticipation
  • Change
  • Supply and demand
  • Substitution
  • Competition
  • Balance
  • Contribution
  • Conformity
  • Externalities

35
Economic Principles Exercises
  • 1. Value constantly fluctuates due to the
    principle of _______.
  • 2. When demand exceeds supply, prices will
    _____.
  • 3. Property uses that compliment each other are
    evidence of the theory of __________.
  • 4. Value is created through the expectation of
    future benefits according to the theory of
    ____________.

change
rise
conformity
anticipation
36
Economic Principles Exercises
  • True or False
  • 5. To an investor, the greater the expectation of
    benefits from a property, the less valuable it is
    to the investor.
  • 6. Surplus productivity is realized after various
    agents of productivity have been satisfied.

FALSE
TRUE
37
Economic Principles Exercises
  • 7. Contribution, whether more or less than cost,
    is measured by the law of __________ and
    ____________ returns.
  • 8. Name the four agents of production (hint
    C-E-L-L)
  • a. Capital
  • b. Entrepreneurship
  • c. Land
  • d. Labor

increasing
decreasing
38
Highest and Best Use
  • There is only one highest and best use for land
    at a given point in time.
  • Land not devoted to highest and best use results
    in a loss of income.
  • Highest and best use gives the owner maximum
    economic advantage.

39
Highest and Best Use
cont.
  • Highest and best use allocates land resources
    efficiently maximizing economic return.
  • Highest and best use gives economic benefits to
    surrounding land (conformity).
  • Highest and best use gives economic benefits to
    the community (conserves a scarce resourceland).

40
Four Tests ofHighest and Best Use
  1. Is the ideal use legally permitted?
  2. Is it physically possible for the ideal structure
    to be built on the property?
  3. Is the ideal use economically (financially)
    feasible on the property?
  4. Is the ideal use the maximally productive use for
    the property?

41
Value of a Vacant Site orAs If the Land Were
Vacant
42
Value of theLand as Improved
43
Application Illustration 1
  • A corner lot with commercial zoning currently is
    improved with a residential dwelling. Determine
    the appropriate highest and best use
    recommendation if demand for the commercial site
    is recognized immediately.
  • Improved value185,000
  • As vacant205,000
  • Demolition cost12,000
  • Recommendation Raise the dwelling to make the
    site vacant.
  • 205,000 12,000 (demolition cost) 193,000
  • 193,000 185,000 8,000 higher value

44
Application Illustration 2
  • A single-family residence is currently valued at
    58,000. The majority of properties within close
    proximity to the subject are duplexes with
    typical values in the range of 79,000. If the
    cost of converting the subjects single-family
    residence into a duplex has been estimated at
    20,000, and the interior demolition is estimated
    to be 1,000, what is the highest and best use
    conclusion?
  • Conclusion The highest and best use of the
    property remains as a single-family residence,
    since there is no entrepreneurial reward for the
    owner upon completion of the conversion.
  • 58,000 20,000 1,000 79,000

45
Application Illustration 3
  • A real property appraiser is performing a highest
    and best use analysis for a vacant parcel. The
    appraiser has determined that the highest and
    best use of the parcel is for a two to four unit
    apartment building with (per maximum lot
    coverage) exterior dimensions of 4,000. Which
    improvement should the appraiser suggest?
  • Two, four-bedroom, three-bath units which could
    each rent for 1,250 per month. Indicated value
    by the income approach is 42.50 per square foot
    and cost of the 4,000 square foot building will
    be 67.00 per square foot.
  • Three, three-bedroom, two-bath units which
    could each rent for 950 per month. Indicated
    value by the income approach is 50.59 per square
    foot and cost of the 4,000 square foot building
    will be 49.00 per square foot.
  • Four, two-bedroom, two-bath units which could
    each rent for 750 per month. Indicated value by
    the income approach is 44.25 per square foot and
    cost of the 4,000 square foot building will be
    45 per square foot.

46
Application Illustration 3
continued
  • Suggested unit type and mix Three three-bedroom,
    two-bath units
  • Two, four-bedroom, three-bath units
  • 4,000 42.50 170,000
  • 4,000 67.00 268,000
  • Three, three-bedroom, two-bath units
  • 4,000 50.59 202,360
  • 4,000 49.00 196,000
  • Four, two-bedroom, two-bath units
  • 4,000 44.25 177,000
  • 4,000 45.00 180,000

47
Application Illustration 4
  • A 20,000 square foot residential lot zoned for
    single-family or two-family use is the subject of
    an appraisal assignment. The lot is currently
    improved with a 1,800 square foot single-family
    residence. What is the indicated highest and best
    use?
  • Vacant land value0.75 per square foot
  • Razing cost8,000
  • Present value of single-family dwelling from
    paired data80 per square foot.
  • Potential monthly rent if converted to
    two-family800 each
  • Indicated value by the income approach per
    square foot96
  • Conversion cost to two-family28,000

48
Application Illustration 4

continued
  • Indicated highest and best use Converted to
    two-units
  • Vacant 20,000 square feet 0.75 per square
    foot 15,000
  • Razing cost 8,000
  • 15,000 8,000 7,000
  • As is 1,800 square feet 80 144,000
  • Converted 1,800 square feet 96 172,800
    28,000 conversion 144,800

49
Application Illustration 5
  • A single-family dwelling contains 1,860 square
    feet and is situated on a commercially zoned lot
    that is 155 x 220.
  • If, through paired-data, the improved property
    has a per square foot value of 58 and the
    commercial land value in this area is 150,000
    per acre, what is the highest and best use if the
    razing cost is estimated to be 20,000?
  • Highest and best use conclusion as-improved
  • As-improved 1,860 58 107,880
  • Vacant 155 220 34,100 43,560 0.7828
    acre
  • 0.7828 150,000 117,424 20,000 97,424

50
Interim Use
  • A temporary use of property while it awaits
    conversion to its highest and best use
  • E.g., waiting for a zoning change or accumulation
    of investment dollars
  • Appraiser must observe the principle of
    consistent use
  • Land cannot be valued for one use while the
    improvements are valued for another use

51
Final Determinationof Highest and Best Use
52
Special Uses
  • Single-use property
  • Multiple-use property
  • Special-use property

53
Surplus and Excess Land
  • Surplus land
  • Portion over and above what is necessary for the
    highest and best use of the subject property and
    does not have a stand-alone highest and best use
  • Excess land
  • Land (or site) area that is not necessary to
    support the use of the existing improvements
    situated on the subject property

54
Highest and Best Use Application Exercise
  • 1. For an improved property, highest and best use
    analyzes whether the current improvements should
    be
  • 2. Zoning is one consideration of
  • 3. Highest and best use gives the property owner
    maximum
  • 4. As a(n) use, the property could
    be held for future development.
  • 5. The four tests of highest and best use are
  • 1. Legally permissible
  • 2. Physically possible
  • 3. Financially feasible
  • 4. Maximally productive

razed, converted, or left as is.
legally permissible.
economic advantage.
interim
55
Case Study 9.1Corner Commercial Site with Use
and Non-Compete Restrictions
56
Case Study 9.1
  • Certified general appraiser, Max Riley, was
    performing a highest and best use analysis of a
    high-visibility corner commercial site that is
    located on Hightowns primary commercial strip.
    Three major shopping malls and strip centers are
    across the street from the subject. Another is
    located adjacent to it on the same side of the
    street.
  • The subject parcel contains approximately one
    acre and is improved with a 1960s automotive
    service station that has not operated for a
    number of years. The site has been rented
    throughout recent years to various vendors
    selling flowers, fruits and vegetables, and other
    seasonal products. The fuel storage tanks have
    been removed from the site and the property has
    been certified to be environmentally sound. The
    property owner, a private individual, realizes
    the property is too valuable to continue its
    present use and has asked appraiser Riley to
    determine its value for marketing purposes.
  • Appraiser Riley surveys the area and the market
    and has found no other sites immediately
    available in this highly desirable area. His
    research has revealed that the last similar
    comparable one-acre parcel sold approximately two
    years ago for 850,000. The comparable parcelan
    interior lot without the corner influencewas
    located approximately 1,000 feet from the
    subject. On inquiry with the broker facilitating
    that transaction, he found the comparable
    property went under contract to a restaurant
    enterprise, soon after being offered to the
    market. The broker also noted that he received
    two additional backup offers for the property.
    One was for 850,000, and the other was for
    900,000. Both of these offers were from similar
    restaurant developers.

57
Case Study 9.1
cont.
Point Break Of the characteristics effecting
value, which characteristics have been identified?
  • Demand
  • Utility
  • Scarcity

58
Case Study 9.1
cont.
  • Further information obtained from the real estate
    broker indicated that all offers for the
    comparable parcel were from restaurants that
    required a site for which a liquor license could
    be obtained. The broker also had interest from
    other non-liquor food service users including
    fast-food facilities. But, none of these
    non-liquor vendors would be willing to pay as
    much as those requiring a liquor license.
    Appraiser Rileys research confirms this trend
    with non-liquor restaurants paying up to 50 less
    than those requiring a liquor license.
    Additionally, appraiser Riley confirms with the
    state liquor control board that a liquor license
    would be available for the site.

59
Case Study 9.1
cont.
Point Break From this information, what
conclusion could be drawn about the highest and
best use of the subject property?
  • Restaurant desiring to sell alcohol

60
Case Study 9.1
cont.
  • After performing a highest and best use analysis
    of the property, appraiser Riley has determined
    that a restaurant use that requires a liquor
    license would be the highest and best use of the
    property. The use as a site for a non-alcohol
    restaurant was analyzed after considering they
    typically pay substantially less for a commercial
    site that option was eliminated. Alternative
    users, such as most retail, typically pay up to
    50 less than a non-alcohol product restaurant.
    After considering supply and demand patterns,
    historic sales data, and the physical
    characteristics of the subject parcel, the
    appraisers value opinion is a range of
    1,200,000 to 1,500,000.
  • Appraiser Riley holds a meeting with the property
    owner. After a presentation of the marketability
    and value opinion of the property, the property
    owner offers that there may be a problem. The
    property owner inherited the property from his
    mother, a conservative lady who was strongly
    opposed to alcohol. He believes there may be some
    restriction relating to alcohol and the use of
    the property. Following up on this information,
    appraiser Riley finds a deed restriction stating
    the property may never be used for the sale or
    consumption of alcohol.

61
Case Study 9.1
cont.
Point Break How does this deed restriction impact
the use and value of the property?
  • The number of interested users has been affected
    by the restriction.
  • Based on the data given, the property's value
    diminishes by at least 50.

62
Case Study 9.1
cont.
Point Break Are there potential remedies or
alternatives?
  • Since the owner inherited the property and
    the restriction, he might be able to file for
    a court action to have the restriction
    removed

63
Case Study 9.1
cont.
  • Appraiser Riley suggests that the property owner
    seek legal counsel to discuss the restriction and
    any potential solutions. Legal counsel suggests
    that, in this particular case, a court action
    could be filed to seek removal of the restriction
    claiming it is unreasonable and has a significant
    and unreasonable impact on the property value as
    alternative highest and best uses could result in
    up to a 50 downward impact on it.
  • After deep consideration, the property owner was
    not willing to challenge his mothers request.

64
Case Study 9.1
cont.
Point Break How does this information affect the
highest and best use?
  • Changes the highest and best use to an
    establishment that does not sell liquor, such as
    fast food

65
Case Study 9.1
cont.
  • With this decision, the appraiser now deems the
    highest and best use to be as a food service
    facility that does not sell liquor. At this
    point, the property owner tells appraiser Riley
    that he also owns the land and building
    immediately next door to the subject. It was
    built for and leased to a fast-food facility
    specializing in roast beef sandwiches about 25
    years ago. He also inherited this property. The
    restaurant has been a good tenant and is
    currently engaged in a lease with 10 years
    remaining. Appraiser Riley asks to review the
    fast-food restaurants lease.

66
Case Study 9.1
cont.
Point Break What type of information is appraiser
Riley looking for?
  • A non-compete agreement

67
Case Study 9.1
cont.
  • In the course of reviewing the lease, appraiser
    Riley finds what he suspectedthe non-compete
    agreement. The agreement states that during the
    term of this lease, no property owned by the
    lessor, within a three mile radius, shall be sold
    or leased for the sale or consumption of roast
    beef, hamburgers, chicken, and fish.

68
Case Study 9.1
cont.
Point Break How has the information impacted
highest and best use and the value of the
property? What vital characteristic of value is
at issue, or not present?
  • Eliminates most fast food users
  • As the uses of a property diminish, so does the
    propertys value

The property was sold to chain of doughnut shops.
They paid 375,000 for the site.
69
Chapter 9 Quiz
  • 1. Highest and best use
  • allocates land resources efficiently.
  • always considers the intended use of the owner.
  • can be several different uses at any given time.
  • results in a minimal loss of income.

70
Chapter 9 Quiz
  • 2. Externalities can be a positive or negative
    influence on value, primarily due to the property
    characteristic of
  • balance.
  • immobility.
  • level benefits.
  • surplus productivity.

71
Chapter 9 Quiz
  • 3. An interim use might be determined when
  • the appraiser is unable to make a determination
    due to limited data.
  • the owner cannot make up his mind on what to do.
  • a reasonable and probable change in circumstances
    is forthcoming.
  • waiting for a volatile market to settle before
    deciding.

72
Chapter 9 Quiz
  • 4. Regarding physically possible, which would
    NOT be considered?
  • building materials
  • building set back lines
  • parking requirements
  • size of the building

73
Chapter 9 Quiz
  • 5. A school building might be an example of a(n)
    __________ property.
  • commercial-use
  • multiple-use
  • special-use
  • utility-use

74
Chapter 9 Quiz
  • 6. When the highest and best use of the property
    is vacant, the current improvements are
  • in a state of equilibrium.
  • lending no value to the vacant site.
  • taking away from the value of the vacant site.
  • taking away from the vacant site value by more
    than the cost to raze the improvements.

75
Chapter 9 Quiz
  • 7. When a buyer will not pay more for something
    than its cost, the buyer is influenced by
  • contribution.
  • opportunity cost.
  • substitution.
  • supply and demand.

76
Chapter 9 Quiz
  • 8. Which is NOT one of the four agents of
    production?
  • capital
  • gross profit
  • labor
  • land

77
Chapter 9 Quiz
  • 9. The law of diminishing returns is most
    directly linked to which economic principle?
  • change
  • competition
  • contribution
  • substitution

78
Chapter 9 Quiz
  • 10. When properties are listed at a certain price
    in the neighborhood, that price tends to set the
    limits of value for other properties around it,
    according to the concept of
  • balance.
  • competition.
  • contribution.
  • Substitution.

79
Chapter 9 Quiz
  • 11. Which economic principle suggests that value
    is created through expectation of future
    benefits?
  • anticipation
  • balance
  • contribution
  • surplus productivity

80
Chapter 9 Quiz
  • 12. Which of the following is likely to
    contribute the most value?
  • adding 500 square feet to a 1,200 square feet
    house, where 1,200 square feet is the predominant
    square footage
  • adding a fence where fences are prohibited
  • adding a second bath to a three-bedroom house,
    where three bedrooms, two baths is the norm
  • changing granite countertops to laminate

81
Chapter 9 Quiz
  • 13. The largest and most expensive house in the
    neighborhood could likely be experiencing
    regression through which economic principle?
  • anticipation
  • conformity
  • substitution
  • surplus productivity

82
Chapter 9 Quiz
  • 14. When might a residual physical segment of a
    land parcel be considered surplus site?
  • if it is needed for future expansion of the
    subjects improvements
  • if it would be legally permissible to have
    another house built on it
  • when it cannot be legally sold separately from
    the subject property
  • when it could freely transfer and be made
    available to the open market

83
Chapter 9 Quiz
  • 15. Which is included within the test of legally
    permissible?
  • allowable to zoning
  • hazard insurance could be obtained
  • police protection is available
  • title is free of encumbrances

84
Chapter 10
  • Overview of
  • Market Fundamentals

85
Chapter 10 Objectives
  • After completing this chapter, students will be
    able to
  • Identify supply and demand model as part
    governmental and part economic
  • Describe the role of money and capital markets

86
Key Terms
  • Adjustable Rate Mortgages (ARMs)
  • Amortization
  • Amortized Loans
  • Balloon Mortgage
  • Command Economic System
  • Conforming Loan
  • Conventional Loan
  • Debt
  • Deficit Spending
  • Discount Rates
  • Economics
  • Equity
  • Federal Budget Deficit
  • Fed Funds Rate

87
Key Terms
cont.
  • Federal Home Loan Mortgage Corporation (Freddie
    Mac)
  • Federal National Mortgage Association (Fannie
    Mae)
  • Federal Open Market Committee (FOMC)
  • Federal Reserve Banks
  • Federal Reserve Board
  • Fiscal Policy
  • Government Loan
  • Government National Mortgage Association (Ginnie
    Mae)
  • Inflation
  • Monetary Policy
  • Moral Suasion

88
Key Terms
cont.
  • Mortgage
  • Mortgagee
  • Mortgagor
  • Nonconforming Loan
  • Open Market Operations
  • Portfolio Lenders
  • Primary Mortgage Markets
  • Private Mortgage Insurance (PMI)
  • Purchase Money Mortgage
  • Reserve Requirements
  • Secondary Mortgage Markets
  • U.S. Treasury Department

89
Broad Economic Concepts
  • Economics The study of how resources are
    allocated
  • Fiscal policy
  • Monetary policy

90
Command Economyvs. Market Economy
  • Command economic system
  • Government or other central authority makes all
    decisions about production and distribution
  • Market economic system
  • Individual people and businesses are free to make
    their own decisions about production and
    distribution

91
Supply-Side vs.Demand-Side Economics
  • Supply-side economics
  • Seeks to create economic activity by having the
    government lower taxes
  • Allow market forces to determine where the most
    productive investment and job creation should
    take place
  • Demand-site economics
  • Seeks to create economic activity through
    government spending aimed at job creation
  • Keynesian economics

92
Money Supply
  • Fiscal policy
  • U.S. Treasury Department, IRS
  • Deficit spending, taxation
  • Monetary policy
  • Federal Reserve Board
  • Prices, interest rates, financial markets

93
Monetary Policy Implementation
  • Four tools used by the FED (D O R M)
  • Discount rates
  • Open market operations
  • Reserve requirements
  • Moral suasion

94
Role of Moneyand Capital Markets
  • Competing investments
  • Debt investors Conservative and passive favor
    bonds and mortgages with a certain return and
    repayment of principal
  • Equity investors Aggressive and open to more
    risk venture capital
  • Sources of capital
  • Debt and equity
  • Cash, REITs, partnerships, syndications, joint
    ventures, pension funds, insurance companies

95
Mortgage Markets
  • Primary mortgage markets
  • Lenders who make mortgage loans directly to
    borrowers
  • Portfolio lenders
  • Secondary mortgage markets
  • Private investors and government agencies that
    buy and sell real estate mortgages

96
Function of Secondary Mortgage Markets
  • Buy and sell mortgages from primary market
    lenders
  • The primary lenders (e.g., local banks) then have
    more money to lend to other potential borrowers
  • Local banks invest surplus funds in real estate
    investments from other regionsreal estate cycles
    are then moderated by stable investments from
    areas going through different phases of the cycle
  • Standardization loan criteria

97
The Agencies ofSecondary Mortgage Market
  • Federal National Mortgage Association (Fannie
    Mae)
  • Government National Mortgage Association (Ginnie
    Mae)
  • Federal Home Loan Mortgage Corporation (Freddie
    Mac)

98
Conforming vs. Nonconforming Loan
  • Conforming loan
  • General terms of the mortgage loan application
    meet the requirements of the secondary markets
    underwriting guidelines or a private investors
    lending policy
  • Considered low risk for the investor
  • Nonconforming loan
  • Have one or more underwriting indicators that
    fall outside the acceptable range of guidelines
  • Considered higher risk for the originating lender

99
Underwriting Standards
  • Loan-to-value (LTV) ratios
  • Income-expense ratios
  • In order to sell mortgages on the secondary
    market, lenders must conform to underwriting
    guidelines
  • Implements quality control
  • Increases quality of the loans lenders make

100
Overview of Mortgages
  • First mortgage
  • A security instrument that has a first mortgage
    lien position has priority over all other
    mortgages
  • Second mortgage
  • A security instrument in second lien position
  • Also called junior mortgages
  • Amortization
  • The principal and interest of a loan is repaid in
    installments

101
Types of Mortgages
  • Conventional loans
  • May have private mortgage insurance (PMI)
  • Government loans
  • FHA loans, VA loans
  • Adjustable rate mortgages (ARMs)
  • Purchase money mortgages
  • Balloon mortgages

102
Chapter 10 Quiz
  • 1. The federal government influences the money
    supply through
  • fiscal and monetary policy.
  • physical and social factors.
  • rules of equilibrium.
  • supply and demand.

103
Chapter 10 Quiz
  • 2. The Treasury Department is NOT responsible for
  • federal spending.
  • managing the federal deficit.
  • tax collection.
  • secondary mortgage markets.

104
Chapter 10 Quiz
  • 3. The Federal Reserve System has how many
    regional Federal Reserve Banks?
  • 6
  • 8
  • 12
  • 14

105
Chapter 10 Quiz
  • 4. Tools used by the Fed to implement monetary
    policy include
  • Congressional Acts.
  • discount rates and reserve requirements.
  • fiscal assertiveness.
  • prime rates and subprime rates.

106
Chapter 10 Quiz
  • 5. The U.S. Treasury is responsible for
    __________ policy.
  • economic
  • fiscal
  • monetary
  • social

107
Chapter 10 Quiz
  • 6. The amount a commercial bank must keep on
    deposit is known as
  • equilibrium.
  • monetary policy.
  • reserve requirements.
  • supply and demand.

108
Chapter 10 Quiz
  • 7. If the federal government spends less money
    than revenue, which would likely occur?
  • Interest rates would rise sharply for mortgage
    loans.
  • Federal Reserve Board would not meet.
  • Market equilibrium would occur in the Federal
    Reserve.
  • More funds would be available for real estate
    loans.

109
Chapter 10 Quiz
  • 8. Tax credits, such as those created through the
    American Recovery and Reinvestment Act of 2009,
    are an example of which force influencing the
    value of real property?
  • economic
  • governmental
  • physical
  • social

110
Chapter 10 Quiz
  • 9. Which is NOT a source of equity used as
    capital for acquisition of investment real
    estate?
  • joint ventures
  • mortgages
  • partnerships
  • pensions funds

111
Chapter 10 Quiz
  • 10. What is the lump-sum remaining principle
    balance referred to that is payable when a
    mortgage loan is not fully amortized?
  • balloon balance
  • deficit balance
  • discount balance
  • passive balance

112
Chapter 10 Quiz
  • 11. In general, conforming conventional mortgage
    loans represent
  • less risk of loss to the lender.
  • a loan avenue for borrowers who have a high debt
    to income ratio.
  • loans that are insured or guaranteed by the
    government.
  • an opportunity to charge a higher interest rate.

113
Chapter 10 Quiz
  • 12. Which is an advantage of the secondary
    mortgage market?
  • Lenders can sell existing lower interest rate
    loans to free-up money.
  • The lender is only lending funds from their
    institutions deposits.
  • Secondary market loans are only for home equity
    loans, so there is less risk.
  • There are no national requirements for the
    secondary market.
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