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Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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Page 1: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

Real Estate Economics & Value

Basic Real Estate Appraisal: Principles & Procedures – 9th Edition

© 2015 OnCourse Learning

Chapter 5

Page 2: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th 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

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Page 3: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 4: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 5: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

BROAD FORCES INFLUENCING VALUE

Physical Forces

Social Forces

Economic Forces

Political Forces5

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Page 6: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

PHYSICAL FORCES

•Natural Resources

•Developed Resources

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Page 7: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

SOCIAL FORCES

1. Demographics2. Neighborhood Stability3. Population4. Life Styles and Living Standards5. Attitudes; Behavior, Law, Government6. Attitudes; Development, Growth, Ecology7. Attitudes; Public Education

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Page 8: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 9: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 10: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 11: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 12: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

REAL ESTATE SUPPLY FACTORS

• Housing Supply(Existing)

• New Construction(Near-term Additions)

• Supply of Vacant Land(Future Supply)

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Page 13: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

REAL ESTATE DEMAND FACTORS

•Population• Households

•Purchasing Power• Affected by Employment, Wage/ Income Levels• Disposal Income (After Taxes)• Depends on Availability of Financing / Credit

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Page 14: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 15: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

FEDERAL GOVERNMENT ACTIVITY

Energy and the Environment• Environmental Protection Agency (EPA)• Energy-Efficient Appliances• Energy-Efficient Homes• Green Building• Sustainable Design

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Page 16: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 17: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 18: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 19: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 20: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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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

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Page 22: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

PROGRESSION OR REGRESSION?

If the home on the left is typical –which principle applies to the home on the right?

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Page 23: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 24: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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PR ICE

QUANTITY

Demand

Supply

Page 25: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

PRINCIPLE OF COMPETITION

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

Ruinous Competition

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Page 26: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 27: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

AGENTS OF PRODUCTION

• Labor

•Coordination• Management, Effort

•Capital• Construction Costs, Returns

• Land• Residual – Last $’s to the 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 Income becomes Basis for 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.

The 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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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

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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

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Page 33: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 34: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

PRINCIPLE OF ANTICIPATION

•Value is essentially an expression of the Present Worth of Future Benefits• This Principle underlies the Income

Approach to Value

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Page 35: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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.

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Page 36: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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.

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Page 37: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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Page 38: Real Estate Economics & Value Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 5

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

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