REAL ESTATE ECONOMICS AND VALUE

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Chapter 5

• REAL ESTATE ECONOMICS AND VALUE

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CHAPTER TERMS AND CONCEPTS

• Agents of production
• Amenities
• Demand
• Demography
• Economic forces
• Fiscal policy
• Gross domestic product (GDP)
• Monetary policy
• Monetary theory

• Over-improvement
• Physical forces
• Political forces
• Principle of anticipation
• Principle of change
• Principle of competition
• Principle of conformity
• Principle of increasing and
• decreasing returns

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CHAPTER TERMS AND CONCEPTS

• Principle of progression and
• principle of regression
• Principle of substitution
• Principle of supply and demand
• Principles of highest and best use
• and consistent use
• Principles of surplus
• productivity, balance, and
• contribution

• Purchasing power
• Real estate cycle
• Scarcity
• Secondary market
• Social forces
• Supply
• Surplus of productivity
• Transferability
• Utility

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LEARNING OUTCOMES

1. List the four basic elements of value.
2. List and give examples of the broad forces that
   affect value.
3. Define real estate cycles.
4. Name the major supply and demand factors that
   cause economic changes affecting real estate.
5. Describe the federal governments role in the
   economy.
6. Explain how the principles of value relate to the
   marketing and productivity of real estate.

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THE REAL ESTATE VALUE INFLUENCES

• Real Estate has no Intrinsic Value
• Value is Derived from Rights and Benefits that
  Come from
• Ownership
• Possession and
• Use

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FOUR ESSENTIALS OF VALUE

• Utility
• Usefulness the ability to create a desire for
  possession
• Scarcity
• In relatively short supply a lack of abundance
• Demand
• The desire to possess plus the ability to buy
  effective purchasing power
• Transferability
• The ability to change the owner or use
  marketable title

Market Value
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BROAD FORCES INFLUENCING VALUE

• Physical Forces
• Social Forces
• Economic Forces
• Political Forces

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PHYSICAL FORCES

• Natural Resources
• Developed Resources

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SOCIAL FORCES

1. Demographics
2. Neighborhood Stability
3. Population
4. Life Styles
5. Attitudes Behavior
6. Attitudes Development
7. Attitudes Public Education

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ECONOMIC FORCES

1. Income Levels
2. Employment
3. Wages and Jobs
4. Money and Credit
5. Price Levels
6. Personal Savings
7. General Business Activity
8. Supply and Demand for Housing
9. Production of Goods and Services

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POLITICAL FORCES

1. Zoning and Land Use
2. Building and Safety
3. Environmental Laws
4. Endangered Species Act
5. Police, Fire, and Health
6. Crime Prevention
7. Public Works
8. Fiscal Policy
9. Monetary Policy
10. Government Sponsored Programs
11. Government Regulations

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HOW ECONOMIC TRENDS AFFECT REAL ESTATE

• Economic Trends and the Business Cycle
• Real Estate Supply Factors
• Real Estate Demand Factors
• Federal Government Activity

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ECONOMIC TRENDS AND THE BUSINESS CYCLE

• An Economic Trend is a Pattern of Changes
• Cycles
• Business cycles
• Real Estate Cycles
• The Cycle of Construction
• New Home Sales
• Volume of Sales

Used by Permission of Alma Dizon
www.riverside-real-estate.us
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REAL ESTATE SUPPLY FACTORS

• Housing Supply
• New Construction
• Supply of Vacant Land

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REAL ESTATE DEMAND FACTORS

• Population
• Purchasing Power

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FEDERAL GOVERNMENT ACTIVITY

• Housing and Urban Development Programs
• FNMA
• Federal National Mortgage Association
• Secondary Market
• FHA
• Federal Housing Administration

Figure 5.5 Government Housing Project under
Construction
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FEDERAL GOVERNMENT PROGRAMS

• Energy and the Environment
• EPA
• Environmental Protection Agency
• FEMA
• Flood Maps
• Governmental Banking and Monetary Policy
• Federal Reserve
• Monetary Policy Actions

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THE ECONOMIC PRINCIPLES OF VALUATION

• Principle of Substitution
• Principle of Conformity
• Principle of Progression
• Principle of regression
• Principle of Change
• Principle of Supply and Demand
• Principle of Competition

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PRINCIPLE OF SUBSTITUTION

• When a Property Easily can be Replaced by
  Another, the Value of Such a Property Tends to be
  Set by the Cost of Acquiring an Equally Desirable
  Substitute
• The Principle of Substitution is a Basic Concept
  Behind Each of the Three Approaches to Value

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PRINCIPLE OF CONFORMITY

• Maximum Value
• Properties are similar
• Size
• Style
• Quality
• Amenities/Utility
• Over-improvement
• 5 bedroom in a 3 bedroom neighborhood

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PRINCIPLES OF REGRESSION PROGRESSION

• Progression
• Lower value properties benefit from being close
  to high value properties
• Regression
• Higher value properties tend to decrease in value
  when close to lower value properties.
• Is This an Illustration of Progression or
  Regression?

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PRINCIPLE OF CHANGE

• Change is Eternal
• Physical
• Social
• Economic
• Political conditions
• Neighborhood Change
• Development (growth)
• Stability
• Decline
• Renaissance (rebirth)

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PRINCIPLE OF SUPPLY AND DEMAND

• Price Goes Up with an Increase in Demand or
  Decrease in Supply
• Price Goes Down with a Decrease in Demand or
  Increase in Supply
• Theoretically, when Supply and Demand are in
  Balance, Market Prices Reflect the Cost of
  Production with Reasonable Profit

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Principle of Competition

• Market Demand Generates Profits
• Profits Generate Competition
• Excess Profits Usually Generate Ruinous
  Competition

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PRINCIPLES OF REAL ESTATE PRODUCTIVITY

• Agents of Production
• Principles of
• Surplus Productivity
• Balance
• Contribution
• Principle of Increasing and Decreasing Returns
• Principle of Highest and Best Use
• Principle of Consistent Use
• Principle of Anticipation

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AGENTS OF PRODUCTION

• Labor
• Coordination
• Capitol
• Land

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PRINCIPLE OF SURPLUS PRODUCTIVITY

• The Net Income or Other Benefits that Remain
  after the Cost of Labor, Coordination, and
  Capital have been satisfied have been described
  as the Residual Returns to Land.
• Surplus of Productivity
• Dollar Amount of Surplus becomes Basis of Land
  Value

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PRINCIPLE OF BALANCE

• Proper Balance in the Agents of Production is
  Required if the Maximum Value is to Result from
  the Costs Invested.
• Consistent with Principle of Conformity

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PRINCIPLE OF CONTRIBUTION

• The Benefit of An Agent of Production Depends Not
  on Cost But How Much it Contributes to Value
• A pool may cost 25,000 but only contribute
  10,000 of value.
• Principle of Surplus Productivity is the basis
  for the Principle of increasing and decreasing
  returns and the principle of highest and best use.

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INCREASING DECREASING RETURNS

• Fertilizer Principle!
• Added increments of fertilizer and labor do not
  result in equal increases in crop yield
• This principle helps property owners make
  decisions about adding improvements or remodeling
• What to add and to what degree

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PRINCIPLE OF HIGHEST AND BEST USE

• Highest and Best Use Means the Most Profitable
  Use
• Theoretical Balance Between Land and Improvements
• Helps in estimating land value
• Highest and Best Use as
• Vacant
• Improved

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PRINCIPLE OF CONSISTENT USE

• Corollary to the Principle of Highest and Best
  Use
• Must appraise land and improvements on the basis
  of the same use.
• This photo shows that the improvements (house)
  are a detriment to development of town homes.

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PRINCIPLE OF ANTICIPATION

• Value is the Present Worth of Future Benefits
• The Principle of Anticipation Underlies the
  Income Approach to Value.

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SUMMARY
Real estate is a basic and fundamental form of
wealth, it has no intrinsic value. Its market
value is a measure of the rights that the owners
control, valued at prices set in the market. But
in order to enter the market, the rights must
have the four elements of utility, scarcity,
demand, and transferability. We know that real
estate is affected by changing business
conditions, such as employment, income and price
levels, production volumes, and building
construction costs. Thus, it is possible to
analyze and better understand real estate by
observing key supply and demand factors in the
general economy.