View
220
Download
0
Category
Tags:
Preview:
Citation preview
Real Estate Economics & Value
Basic Real Estate Appraisal: Principles & Procedures – 9th Edition
© 2015 OnCourse Learning
Chapter 5
STUDENT LEARNING OUTCOMES
• List the Four Basic Elements of Value• List and give examples of the broad
forces that affect value•Define Real Estate Cycles•Name major supply & demand factors•Describe Federal government’s role in
the economy• Explain how Principles of Value relate to
the Marketing and Productivity of Real Estate
2
Page118
© 2015 OnCourse Learning
5.1 REAL ESTATE VALUE INFLUENCES
•Real Estate has No Intrinsic Value•Value is Derived from Rights and
Benefits that come from:•Ownership• Possession•Use
i.e. Property Rights3
Page 119
© 2015 OnCourse Learning
FOUR ESSENTIALS ELEMENTS OF VALUEUtility• Usefulness; ability to create desire for possessionScarcity• In relatively short supply; a lack of abundanceDemand• The desire to possess plus the ability to buy; plus
the effective purchasing power to implement it
Transferability• Ability to change the owner or use; marketable title
In Combination They Create Market Value4
Page 119
© 2015 OnCourse Learning
BROAD FORCES INFLUENCING VALUE
Physical Forces
Social Forces
Economic Forces
Political Forces5
Page 120
© 2015 OnCourse Learning
PHYSICAL FORCES
•Natural Resources
•Developed Resources
6
Page 120
© 2015 OnCourse Learning
SOCIAL FORCES
1. Demographics2. Neighborhood Stability3. Population4. Life Styles and Living Standards5. Attitudes; Behavior, Law, Government6. Attitudes; Development, Growth, Ecology7. Attitudes; Public Education
7
Page 121
© 2015 OnCourse Learning
ECONOMIC FORCES
1. Income Levels2. Employment3. Wages and Jobs4. Money and Credit5. Price Levels6. Personal Savings7. General Business Activity8. Supply and Demand for Housing9. Production of Goods and Services
8
Page 122
© 2015 OnCourse Learning
POLITICAL FORCES1. Zoning and Land Use2. Building and Safety3. Environmental Laws4. Endangered Species Act5. Police, Fire, and Health6. Crime Prevention7. Public Works8. Fiscal Policy9. Monetary Policy10.Government Sponsored Programs11.Government Regulations
9
Page 122
© 2015 OnCourse Learning
5.2 HOW ECONOMIC TRENDS AFFECT REAL ESTATE
• Economic Trends & the Business Cycle•Real Estate Supply Factors•Real Estate Demand Factors• Federal Government Activity
Detailed on the following slides
10
Page 123
© 2015 OnCourse Learning
ECONOMIC TRENDS / BUSINESS CYCLE
• An Economic Trend is a Pattern of Changes• Cycles – a Change Repeats Itself• Business Cycles• Real Estate Cycles• Number of New Subdivision Lots• Amount of New Construction• Volume of Sales
11
Page 124
© 2015 OnCourse Learning
REAL ESTATE SUPPLY FACTORS
• Housing Supply(Existing)
• New Construction(Near-term Additions)
• Supply of Vacant Land(Future Supply)
12
Page 126
© 2015 OnCourse Learning
REAL ESTATE DEMAND FACTORS
•Population• Households
•Purchasing Power• Affected by Employment, Wage/ Income Levels• Disposal Income (After Taxes)• Depends on Availability of Financing / Credit
13
Page 127
© 2015 OnCourse Learning
FEDERAL GOVERNMENT ACTIVITY
Department of Housing and Urban Development (HUD) Programs• FNMA• FHA (Federal Housing Administration)• Federal Home Loan Mortgage Corporation
(Freddie Mac)
Mortgage-Backed Securities aresold on the Secondary Market
14
Page 130
© 2015 OnCourse Learning
FEDERAL GOVERNMENT ACTIVITY
Energy and the Environment• Environmental Protection Agency (EPA)• Energy-Efficient Appliances• Energy-Efficient Homes• Green Building• Sustainable Design
15
Page 131
© 2015 OnCourse Learning
FEDERAL GOVERNMENT PROGRAMS
Government Banking & Monetary Policy• Federal Reserve
• Monetary Policy (Interest Rates, etc.)• FDIC (Insures consumer deposits at banks)
Fiscal Policy• Taxation (Tax Reform, etc.)• Spending
16
Page 132
© 2015 OnCourse Learning
5.3 ECONOMIC PRINCIPLES OF VALUE
• They Define & Predict Market Patterns• The Principles Apply Collectively• Rarely Independent of Each Other• There are two groups of Principles:• Principles of Marketability• Principles of Productivity
17
Page 133
© 2015 OnCourse Learning
PRINCIPLES OF REAL ESTATE MARKETABILITY•Principle of Substitution•Principle of Conformity•Principles of Progression & Regression•Principle of Change•Principle of Supply and Demand•Principle of Competition
Detailed on the following slides18
Page 134
© 2015 OnCourse Learning
PRINCIPLE OF SUBSTITUTION
• When a Property can Easily be replaced by Another, the Value of Such a Property Tends to be Set by the Cost of Acquiring an Equally Desirable Substitute
• A Basic Concept Behind Each of the Three Approaches to Value
19
Page 134
© 2015 OnCourse Learning
PRINCIPLE OF CONFORMITY
Maximum Value is Achieved when Properties are Similar as to…• Size• Style•Quality•Amenities / Utility
Example: A 5-bedroom home in a 3-bedroom neighborhood does not conform; it would be an over-improvement and it’s value suffers
20
Page 134
© 2015 OnCourse Learning
PRINCIPLES OF PROGRESSON AND REGRESSION
Progression• Lower-value properties benefit (increase in
value) from proximity to higher-value properties
Regression• Higher-value properties suffer (decrease in
value) from proximity to lower-value properties
21
Page 135
© 2015 OnCourse Learning
PROGRESSION OR REGRESSION?
If the home on the left is typical –which principle applies to the home on the right?
22
Page 135
© 2015 OnCourse Learning
PRINCIPLE OF CHANGE
Change is Eternal, as to these Conditions:• Physical• Social• Economic• Political
Four Stages (i.e. Neighborhood Cycle) apply:• Development, Stability, Decline & Renaissance
23
Page 135
© 2015 OnCourse Learning
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 a Reasonable Profit
24
Page 135
© 2015 OnCourse Learning
PR ICE
QUANTITY
Demand
Supply
PRINCIPLE OF COMPETITION
•Market Demand Generates Profits•Profits Generate Competition• Excess Profits Usually Generate
Ruinous Competition
25
Page 136
© 2015 OnCourse Learning
PRINCIPLES OF REAL ESTATE PRODUCTIVITY• Agents of Production• Principles of Surplus Productivity,
Balance & Contribution• Principle of Increasing & Decreasing
Returns• Principle of Highest & Best Use• Principle of Consistent Use• Principle of Anticipation
Detailed on the following slides
26
Page 136
© 2015 OnCourse Learning
AGENTS OF PRODUCTION
• Labor
•Coordination• Management, Effort
•Capital• Construction Costs, Returns
• Land• Residual – Last $’s to the Land
27
Page 136
© 2015 OnCourse Learning
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 Income becomes Basis for Land Value
28
Page 137
© 2015 OnCourse Learning
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
29
Page 137
© 2015 OnCourse Learning
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.
The Principle of Surplus Productivity is the Basis for the Principle of Increasing and Decreasing Returns and the Principle of Highest and Best Use
30
Page 138
© 2015 OnCourse Learning
PRINCIPLE OF INCREASING & DECREASING RETURNSFertilizer 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
31
Page 138
© 2015 OnCourse Learning
PRINCIPLE OF HIGHEST & 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 If Vacant• As Improved
32
Page 138
© 2015 OnCourse Learning
PRINCIPLE OF CONSISTENT USE
Corollary to the Principle of Highest and Best Use…• Land and Improvements must be
appraised on the basis of the same use• If highest and best use for a site is for
apartment development, the house value cannot be added to the apartment site value
33
Page 139
© 2015 OnCourse Learning
PRINCIPLE OF ANTICIPATION
•Value is essentially an expression of the Present Worth of Future Benefits• This Principle underlies the Income
Approach to Value
34
Page 139
© 2015 OnCourse Learning
CHAPTER 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.
35
Page 139
© 2015 OnCourse Learning
CHAPTER SUMMARY (Con’t.)
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.
36
Page 140
© 2015 OnCourse Learning
IMPORTANT TERMS & CONCEPTSAgents of Production Physical Forces
Amenities Political Forces
Business Cycles Principle of Anticipation
Demand Principle of Change
Demography Principle of Competition
Economic Forces Principle of Conformity
Fiscal Policy Principle of Increasing & Decreasing Returns
Gross Domestic Product (GNP) Principles of Progression & Regression
Monetary Policy Principle of Substitution
Monetary Theory Principle of Supply and Demand
Over-Improvement Principles of Highest & Best Use and Consistent Use
37
Page 142
© 2015 OnCourse Learning
IMPORTANT TERMS & CONCEPTS
Principles of Surplus Productivity, Balance, and Contribution
Purchasing Power
Real Estate Cycle
Scarcity
Secondary Markets
Social Forces
Supply
Surplus of Productivity
Transferability
Utility
38
Page 142
© 2015 OnCourse Learning
Recommended