CHAPTER SEVENCHAPTER SEVEN

SINGLE FAMILY HOUSING: PRICING, INVESTMENTS, AND

TAX INVESTMENTS

Demand - Single FamilyDemand - Single Family House Prices House Prices

• Population Growth

• Household formations

• Employment

• Household Income

• Interest Rates

• Federal Income Tax Policy

• Cost of Renting

Tax Treatment of Tax Treatment of Personal ResidencePersonal Residence

• Interest deductions– Primary residence– Second residence

• Maximum interest deductions– Acquisition debt- $1,000,000– Home equity debt- $100,000

• Points on mortgage loans• Real Estate taxes• Capital gain exclusion

Tax Treatment of Tax Treatment of Second ResidenceSecond Residence

• Interest

• Points- amortized

• No capital gain exclusion

• Vacation homes- special rules

Advantages of RentingAdvantages of Renting

• Flexibility

• Lack of down payment

• Credit quality of resident

• Risks of ownership

• Maintenance

• “Bubbles” in house price

Pricing Property: AppraisalsPricing Property: Appraisals

• Market or sales comparison approach

• Cost approach

• Income approach

Sales Comparison ApproachSales Comparison Approach

• Adjustments for– Time– Location– View– Design appeal– Quality of construction– Age

Sales Comparison Approach Sales Comparison Approach ContinuedContinued

• Adjustments continued:– Condition– Size– Quality of interior– Functional utility– Type and condition of systems; i.e.,

HVAC– Sale or financing concessions

Cost ApproachCost Approach

• Value of land plus estimate of improvements

• Depreciation– Physical depreciation– Functional obsolescence– External obsolescence– Curable vs. incurable

Income ApproachIncome Approach

• Gross rent multiplier

• Difficult to use for single family residential properties