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Chapter 5

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IMPORTANT ECONOMIC FEATURES OF REAL ESTATE

Market: a place where buyers and sellers meet to exchange items of value.

There are numerous buyers and sellersBuyers and sellers are knowledgeable and

free to move in or out of the market.No party has control over the marketBuyers seek the lowest prices

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In a perfect competitive market:

Economic Characteristics of Real Estate Markets

In Real Estate Markets:supply is fixed in the short run. cannot respond quickly to changes in the

market conditions.nonetheless, supply and demand are still an

important factors.

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CharacteristicsThe total amount of land is fixedThe intensity of land use can be increased The process of increasing density requires a

substantial amount of time and money.In the short run market prices and rents will

be determined by local changes in demand.

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Perfect MarketsMany ParticipantsAll products are alike and interchangeableItem purchased are small, relatively

inexpensive, & purchased frequently.Government plays little if any role; Laissez-

Faire prevails.Prices are established by the smooth

interaction of supply and demand.

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Typical Real Estate MarketsFew participantsBuyers and sellers are not knowledgeableEach parcel of Real Estate is unique & no two are

alikeThe location is fixedReal Estate is purchased infrequently (rarely

more than four or five times).Government plays a dominant role in Real Estate

development through fiscal and monetary tools and zoning, environmental, and health codes.

Prices are influenced by supply and demand; a lack of knowledge by either the buyer or seller can distort the price paid.

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An increase in demand for real estate will:Reduce existing vacancies of most housing types.Rents and prices will increase.More product will be built because of increased

profits.Supply of new product will grow slowly.Vacancies will begin to rise as increased supply

catches up to demand.Increased vacancies cause a fall in rents and

prices.As the market adjusts to lower rents and prices,

profits will decrease squeezed between rising costs and falling sale prices.

As profits fall, production will decline.

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How the Real Estate Market Reacts to Changes in Demand

Decreased demand for Real Estate will:Increase vacanciesWill cause rents and prices to declineMove people into more spacious

accommodations Cause market segments that cannot compete

to abandon or demolish improvements.Remain in this state until demand once again

increases.

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Changes in demand are caused by:PopulationIncomeAvailability of mortgage creditPersonal lifestylesGovernmental actions

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The advantages of Foreign Ownership of U.S. Real Estate:Generates income & is distributed into the

economyProvides tax revenueGenerates income for Real Estate

professionals

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The disadvantages of foreign ownership:United States becomes less self-sufficientGives the government less incentive to

solve budget problems.High prices due to increased demand

keep local investors out of the real estate market.

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Real Estate Professionals can provide the following services:

Provide current market informationAdvise clients and customersProvide advise on financingHelp close real estate transactionsEncourages selling & buying, making a more

active market.

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The Role of the Real Estate Professional

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Q (Quantity)

P(Price) Equilibrium Price(Point)

Demand Curve

Supply Curve

Demand and Supply in Equilibrium

Demand changes are caused by:PopulationIncomePersonal tastesCreditSubstitute projectsAdvertising

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Supply changes are caused by:Cost of productionNew technologyNew constructionDemolition

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Graphs of the demand and supply curves show how the quantity varies with price. These graphs are a useful tool, to help understand the impact of economic change on prices.

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Demand Curve

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Movement Along the Demand Curve

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Supply Curve

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Movement Along the Supply Curve

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Demand and Supply in Equilibrium

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Shift in Demand

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Shift in Supply

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Shift in Demand

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Shift in Supply

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Increase in Demand, Supply Curve Remaining the Same

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Decrease in Demand, Supply Curve Remaining the Same

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Increase in Supply, Demand Curve Remaining the Same

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Decrease in Supply, Demand Curve Remaining the Same

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Real Estate Demand Curve with a Short-Run Fixed Supply

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Increase in the Demand for Real Estate with a Short-Run Fixed Supply

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Decrease in the Demand for Real Estate with a Short-Run Fixed Supply