Stand out demand

Discovering Real Estate Demand

Introduction

• D. Scott Smith, CCIMProfessor of Real Estate, NAR

• Don’t try this at home!Fair Housing, Steering, Blockbusting

• No magic bullet theory, only less wrong

Discovering Demand

“If you want to make money in real estate you have to focus on Demand” – Feb 2012

Discovering Demand

“RETHINK” Real Estate

• Stop thinking supply side

• Basic Economic Theory + Behavioral Economics

Basic Economic Theory

Basic Economic Theory

Key Concept of Basic Economic Theory

• Economic Sectors Basic + Non Basic Employment

• Economic Base Multiplier Total Employment / Basic Employment

Basic Economic Theory

• Standard Industrial Classification System

• Location QuotientTotal Industry Local / Total Local Employ _________________________

Nation Industry Total / National Total Employ

Basic Economic Theory

• AbsorptionThe rate at which supply is reduced over a given time period.

Answers the “how” of demand. Otherwise known as supply based market analysis

Behavioral Economics

Behavioral Economics Key Concepts of Behavioral Economics

• Decisions not made inside a bubble

• Helps answer the “why”

• All decisions are not wealth maximizing decisions

Behavioral Economics

Example:

White Paint vs. Blue Paint

Behavioral Economics

Non-Monetary Values like

• Fairness• Ethics• Culture• Envy• Fear

Behavioral Economics

Non-Monetary Values• Desire• Policy• Competition• Effort• Motivation

Behavioral Economics

• Bounded Rationality:Rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make decisions.

Behavioral Economics

• Heuristics = HacksExperience-based techniques for problem solving, learning, and discovery that give a solution which is not guaranteed to be optimal.

• speed up the process of finding a satisfactory solution via mental shortcuts

• ease the cognitive load of making a decision • rule of thumb, an educated guess, an intuitive

judgment, stereotyping, or common sense

Behavioral Economics

• Diminishing UtilityExample: More happiness with each beer you drink.

After several beers happiness increases but not at the same rate. Last beer has a lower amount of happiness gain. If you continue to consume, you may even cross over into declining happiness, as you get sick.

Behavioral Economics

Question: Can Money buy happiness?

Answer: Yes! (But only up to a certain point )

Behavioral Economics

• Irrational exuberanceUnsustainable investor enthusiasm that drives asset prices up to levels that aren't supported by fundamentals

What happens when exuberance occurs?

Behavioral Economics

• Herding BehaviorThe tendency for individuals to mimic the actions (rational or irrational) of a larger group. Individually, however, most people would not necessarily make the same choice.

• Relative Positioning How you compare to others

Behavioral Economics

• Loss Aversionthe tendency for people to strongly prefer avoiding losses than acquiring gains. Some studies suggest that losses are as much as twice as psychologically powerful as gains

• losses loom larger than corresponding gains

Behavioral Economics• Example of Loss Aversion • Lets say a deal is going to increase your income by

$200. But in order to gain that surplus you have to also go through a loss. So you gain $1,200 from the deal and then you lose $1,000. You are still up $200 but many won’t want to take that deal because they don’t like the feeling they are left with of losing the $1000. And the same thing happens when you introduce probabilities into the equations.

Example of Loss Aversion

• If you are 90% possible you are going to gain $1,000 and 10% possible you are going to gain $0, the mathematical gain calculate would be $900. Now let’s say you had a comparable deal in which you were only going to gain $800, but it is 100% possible. More people will choose the $800 over the $900 because of loss aversion and risk heuristics.

Ultimatum

• Proposer• Responder• Strike a deal • You keep the % of the deal you strike

But if no deal is made, both get nothing

Ultimatum Results

• Why didn’t you offer a lower % ? • Define “Fair” • Did you maximize your wealth options?

Conventional economics predicts and insists that responder will accept any offer because any above zero increases responders income. And proposer will offer 1%. Behavioral Economics suggest a deal that both can gain from and avoid 100% loss.

Discovering Demand

Basic Economic Theory + Behavioral Economics=

Demand

Measuring Demand

• How to calculate demand?

• Demand Triggers

• Demand Matrix

Measuring DemandD2 = Hassle Free

Emotion Reusable Best overall

Affordability Location Demographics Indicators Psychographics

Measuring Demand

D2= H x E x R x B x A x L x D x I x P

“Herbal Dip”

Hassel Free• Easy access to property

Think poorly designed parking lots• Easy transaction• Think like Apple • Easy negotiation• Connecting all the dots

Emotion

• Psychology of decision• Neuromarketing• Feel good measures• Social norms• Framing

Reuse

• Adaptability• Construction management• Development process• All things become new, recycle it

Best Overall

• Gut Feeling

• Heuristics

• Ethics & Morals

Affordability• Cost + Markup = Price ( > / < ) Market Value• Cost = Raw Materials + Labor ( Cost per sqft +

Hourly Wage ) • Markup= Profit (Rate of Return) + Taxes (Corp.

or Personal) + Overhead (budget) • Market Value = Comps (Price) / DOM /

Growth rate from same DOM prev. • Debt Service Coverage Ratio (Investment)

D2

Location

• Traffic Count• Visibility• Ingress and Egress• Property Positioning or set backs (physical)

Which location is worth more?

Demographics• Study of characteristics in an

identified market

• Hard facts and external realities

• Age, Sex, Income, Race, etc.• www.websitehere.com

Indicators• Used as a forecast for local and national

economies• Demonstrate when an economy expands and

contracts• Different indicators will be looked at for

different asset or investment types

• Employment• Consumer Confidence• CPI• GDP

Psychographs• Sensory component

• Categorization about how you feel about something. VAL System

• The key to understanding what motivates a customer

Psychographs

• Survey method

• Social Interactions

• Data Mining Companies

• Search Engines

VALS System

http://www.strategicbusinessinsights.com/vals/surveynew.shtml

Innovator

•Highest incomes, high self-esteem•Expression of taste•Consumer choices are "finer things”•Image importance

Thinkers

•High-resource group and idealistic•Mature, well-educated •World views, open to change•Practical consumers and rational decision makers

Believers

•Conservative and predictable consumers •Favor American products and brands•Focused on family, community, and religion •Modest incomes

Achievers

•Motivated by achievement and work-oriented•satisfaction from jobs and families•Politically conservative•Respect authority and status quo•Favor established products and services that show off their success to their peers.

Strivers

•Low-resource group, •Motivated by achievements•Values very similar to achievers •Have fewer economic and social, and resources. •Style is extremely important •Strive to emulate people they admire

Experiencers•Median age of 25. •Energy, physical exercise, social activities•Avid consumers, spending on clothing, fast-foods, music, etc.•Emphasis on new products and services

Makers

•Practical people who value self-sufficiency. •Focused on the familiar-family, work, and physical recreation•Have little interest in the broader world.•Appreciate practical and functional products

Survivors

•lowest incomes. •few resources •median age of 61 •tend to be brand-loyal consumers

Demand Rate

Applying Mathematics to Demand

Apply a 1 -10 scaleD2 = Hassle Free = 6

Emotion = 5 Reusable = 1 Best overall = 9

Affordability = 7 Location = 8 Demographics = 6 Indicators = 5 Psychographics = 4

Demand Rate

(6+5+1+9+7+8+6+5+4) / 9 = 51 / 9 = 5.6%Demand Rate = 5.6%

Compare multiple properties

Demand RateDemand Rate = 5.6% Property A

Demand Rate = 4.2% Property B

Demand Rate = 8.3% Property C

Thank you!

Resources

• Real Price of Everything

• Buyology

• Contagious

• Behavioral Economics for Dummies

• Demand