Chapter 5

1. Chapter 5 REAL ESTATE ECONOMICS AND VALUE

2. CHAPTER TERMS AND CONCEPTS • Agents of production • Amenities • Demand • Demography • Economic forces • Fiscal policy • Gross domestic product (GDP) • Monetary policy • Monetary theory • Over-improvement • Physical forces • Political forces • Principle of anticipation • Principle of change • Principle of competition • Principle of conformity • Principle of increasing and • decreasing returns

3. CHAPTER TERMS AND CONCEPTS • Principle of progression and • principle of regression • Principle of substitution • Principle of supply and demand • Principles of highest and best use • and consistent use • Principles of surplus • productivity, balance, and • contribution • Purchasing power • Real estate cycle • Scarcity • Secondary market • Social forces • Supply • Surplus of productivity • Transferability • Utility

4. 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 the major supply and demand factors that cause economic changes affecting real estate. • Describe the federal government’s role in the economy. • Explain how the principles of value relate to the marketing and productivity of real estate.

5. THE REAL ESTATE VALUE INFLUENCES • Real Estate has no Intrinsic Value • Value is Derived from Rights and Benefits that Come from: • Ownership • Possession and • Use

6. FOUR ESSENTIALS OF VALUE • = Market Value • Utility • Usefulness; the ability to create a desire for possession • Scarcity • In relatively short supply; a lack of abundance • Demand • The desire to possess plus the ability to buy; effective purchasing power • Transferability • The ability to change the owner oruse; marketable title

7. BROAD FORCES INFLUENCING VALUE • Physical Forces • Social Forces • Economic Forces • Political Forces

8. PHYSICAL FORCES • Natural Resources • Developed Resources

9. SOCIAL FORCES • Demographics • Neighborhood Stability • Population • Life Styles • Attitudes; Behavior • Attitudes; Development • Attitudes; Public Education

10. ECONOMIC FORCES • Income Levels • Employment • Wages and Jobs • Money and Credit • Price Levels • Personal Savings • General Business Activity • Supply and Demand for Housing • Production of Goods and Services

11. POLITICAL FORCES • Zoning and Land Use • Building and Safety • Environmental Laws • Endangered Species Act • Police, Fire, and Health • Crime Prevention • Public Works • Fiscal Policy • Monetary Policy • Government Sponsored Programs • Government Regulations

12. HOW ECONOMIC TRENDS AFFECT REAL ESTATE • Economic Trends and the Business Cycle • Real Estate Supply Factors • Real Estate Demand Factors • Federal Government Activity

13. ECONOMIC TRENDS AND THE BUSINESS CYCLE Used by Permission of Alma Dizon: www.riverside-real-estate.us • An Economic Trend is a Pattern of Changes • Cycles • Business cycles • Real Estate Cycles • The Cycle of Construction • New Home Sales • Volume of Sales

14. REAL ESTATE SUPPLY FACTORS • Housing Supply • New Construction • Supply of Vacant Land

15. REAL ESTATE DEMAND FACTORS • Population • Purchasing Power

16. FEDERAL GOVERNMENT ACTIVITY Figure 5.5: Government Housing Project under Construction • Housing and Urban Development Programs • FNMA • Federal National Mortgage Association • Secondary Market • FHA • Federal Housing Administration

17. FEDERAL GOVERNMENT PROGRAMS • Energy and the Environment • EPA • Environmental Protection Agency • FEMA • Flood Maps • Governmental Banking and Monetary Policy • Federal Reserve • Monetary Policy Actions

18. THE ECONOMIC PRINCIPLES OF VALUATION • Principle of Substitution • Principle of Conformity • Principle of Progression • Principle of regression • Principle of Change • Principle of Supply and Demand • Principle of Competition

19. PRINCIPLE OF SUBSTITUTION • When a Property Easily can be Replaced by Another, the Value of Such a Property Tends to be Set by the Cost of Acquiring an Equally Desirable Substitute • The Principle of Substitution is a Basic Concept Behind Each of the Three Approaches to Value

20. PRINCIPLE OF CONFORMITY • Maximum Value • Properties are similar • Size • Style • Quality • Amenities/Utility • Over-improvement • 5 bedroom in a 3 bedroom neighborhood

21. PRINCIPLES OF REGRESSION & PROGRESSION • Progression • Lower value properties benefit from being close to high value properties • Regression • Higher value properties tend to decrease in value when close to lower value properties. • Is This an Illustration of Progression or Regression?

22. PRINCIPLE OF CHANGE • Change is Eternal • Physical • Social • Economic • Political conditions • Neighborhood Change • Development (growth) • Stability • Decline • Renaissance (rebirth)

23. PRINCIPLE OF SUPPLY AND DEMAND Supply P r ice Demand Quantity • 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 Reasonable Profit

24. Principle of Competition • Market Demand Generates Profits • Profits Generate Competition • Excess Profits Usually Generate Ruinous Competition

25. PRINCIPLES OF REAL ESTATE PRODUCTIVITY • Agents of Production • Principles of: • Surplus Productivity • Balance • Contribution • Principle of Increasing and Decreasing Returns • Principle of Highest and Best Use • Principle of Consistent Use • Principle of Anticipation

26. AGENTS OF PRODUCTION • Labor • Coordination • Capitol • Land

27. 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 becomes Basis of Land Value

28. 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. 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. • Principle of Surplus Productivity is the basis for the Principle of increasing and decreasing returns and the principle of highest and best use.

30. INCREASING & DECREASING RETURNS • Fertilizer 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. PRINCIPLE OF HIGHEST AND 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: • Vacant • Improved

32. PRINCIPLE OF CONSISTENT USE • Corollary to the Principle of Highest and Best Use • Must appraise land and improvements on the basis of the same use. • This photo shows that the improvements (house) are a detriment to development of town homes.

33. PRINCIPLE OF ANTICIPATION • Value is the Present Worth of Future Benefits • The Principle of AnticipationUnderlies the Income Approach to Value.

34. 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. 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.