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Cause Housing Market Demand Curve to Shift

* Population +
* Household Formation +
* Employment +
* Interest Rate -
* Cost of Renting -
* Tax Rates -

Factors that Impact Housing Market (public goods)

1) Quality of Schools

2) Crime Rates

3) Parks

4) Utilities

5) Health Care

6) Zoning (city ordinances)

7) Transportation access

Hypothecation

the collateral is the house, margin position like stocks

REj

regional employment for industry j

REtot

total regional employment for industry j

USEj

US employment for industry j

USEtot

total US employment for industry j

primary mortgage market

commercial bank, credit unions, savings & loans

YOU AND THE BANK

secondary mortgage market

when bank sells to investor, mortgage bankers

* fannie mae
* freddie mac
* ginnie mae
* private companies

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provides liquidity, mortgages are pooled and brought together

Basic Mortgage Types

1) FRM, CRM

Fixed Rate Mortgage/Constant Payment Mortgage

2) ARM adjustable rate mortgage

3) private

Classification of loan types:

1. Conventional loans
2. Insured Conventional Loan
3. FHA insured loans
4. VA guaranteed loans

Conventional loans

Standard loan with following properties


1. not insured by an agency of federal government
2. loan not guaranteed by agency of federal govt

Conforming loans

loans that meet federal govt standards

* allows the loans to be purchased by Fannie, Freddie

Prime

Conventional: YES

Conforming: YES\*

Alt-A (Liars)

Conventional: YES

Conforming: NO

Subprime

Conventional: YES

Conforming: NO

Jumbo

Conventional: YES

Conforming: NO\*

Traditional Home Loan Underwriting

3 C’s

1) Collateral → House

2) Credit Worthiness

3) Capacity → ability to pay

PMI

Private Mortgage Insurance

guarantees to the lender you put 20% down

Buy PMI?

Home A

100k loan

20% = 20k

LTV = 80k

Nope

Buy PMI?

Home B

5% down → 5,000

LTV = 95%

Yes, buy PMI

With PMI, let’s say the delta Price falls 12k

homeowner loses 12k

bank loses 0

No PMI, let’s say the delta Price falls 12k

homeowner puts 5k down

homeowner loses 5k

bank loses 7k

Items needed to determine if you’re eligible for a loan

1. SSN & ID
2. paystubs from last 30 days
3. w-2
4. proof of sources of income
5. bank statements
6. details of debts
7. gifts
8. alimony

PITI

principal, interest, taxes & income

* monthly payments (pmt/12 and escrow)

GMI

gross monthly income

LTO

long term obligations

* calculated monthly (day care, credit card debt, car loans)

HER

housing expense ratio

* (or front-end ratio)
* considers only a person’s monthly housing expenses

DTI = TDR

debt to income ratio

* considers all of your monthly debt loan
* back-end ratio

HER (housing expense ratio) formula

PITI / GMI

DTI/TDR formula

LTO / GMI

Rule of Thumb

conventional loan → 28/30

FHA loan → 31/43

denominator is DTI

FHA insured

* program designed for borrowers
* cannot make downpayment
* have low credit score
* cannot qualify for conventional loan

who does what?

FHA/VA → Ginnie Mae

Conforming/Conventional → GSE process (Fannie and Freddie)

Nonconforming/unconventional → private securities (mortgage)

FICO categories

1. deep subprime (<580)
2. subprime (580-619)
3. near prime (620-659)
4. prime (660-719)
5. super prime (720-830)

Prime Loan

* fico greater than 660
* LTV = 80%
* HER/DIT = 28/36 (28% is the percent of income going to housing, 36% going to all other debt)
* full documentation

Alt-A Loan

* Alt-A
* fico greater than 620 up to 660
* LTV > 80%
* Poor HER/DTI
* poor documentation

Subprime Loan

* subprime
* fico 580 - 61
* poor
* JUMBO

California Prop 13

tax Bill < 1% of sale price ‘

ex. price of house $500,000 → property tax $5,000

\
house 1: sold in 1980 → 100,000 → property tax 1,000

house 2: sold in 2000 → 450,000 → property tax 4500

house 3: sold in 2022 → 800,000 → property tax 8,000

ad valorem tax

percentage of something

ex.

parcel tax: tax on land $200

property tax: 1% of sale price

Real Estate Valuation

1. Sales Comparison approach → residential
2. Cost approach → special building (replacement) 
3. Income approach - businesses

Goal Estimate Real Estate Value

1. home purchase
2. divorce
3. owners borrowing against the house
4. eminent domain

Fungible vs Non-Fungible

fungible → stock 

non fungible → not identical → houses

Appraisal

unbiased written estimate of a market value of a property

issue → what is subject property value?

how? → use 2 comparable properties

Appraisal Report

final document providing data on how value was estimated (often with pictures or video)

The Valuation Process

1. Identify the appraisal problem
2. determine the scope of work
3. collect data
4. data analysis
5. estimate land value
6. use sales app
7. report value

Transactional agreements (2 Types of Adjustments)

1a) property rights conveyed

Fee Simple Absolute → person has absolute right to land → to use it, dispose of it, to damage

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1b) Financing Terms → conventional, fha, va

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1c) Conditions of the sale → Arms length

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1d) expenditures after the sale

The Income Approach

* to estimate value
* property must generate INCOME

3 Common Income Approaches

1. GIM/GRM → Gross Income Multiplier
2. Direct Capitalization Technique
3. Discounted Present Value

GIM (Apartment Buildings)

Sales Price/Gross income

Gross Income

all amounts received in rent

Net income

Gross income - Expenses on property

PGI vs EGI

Potential Gross Income

Effective Gross Income

Direct Capitalization Technique

Price Value = NOI/R

R → cap rate

NOI = EGI - \[(OE)(EGI)\]

Discounted Present Value

PV(0) or PV(NOT) → discounted cash flows

PV(NOT) = Present Value of all future NOI

\
PV(NOT) = inf t=1

NOI NOI2 NOIinf

\----- + ----- + -------

(1+r)t (1+r)2 (1+r)inf

growth rate of NOI (g)

(NOI1 - NOI0)

g = -------------- = % change NOI

NOI0

PV(NOI)

INF. NOIt NOI1 NOIT \[NOIT+1 / (r-g)\]

----- + ------ + ------ + ----------------

t =1. (1+r)t (1+r)t (1+r)t (1+r)T

Cost Approach

replacement → INSURANCE

reproduction → OLD BUILDINGS

\

1. Sales → Residential
2. Income → Business

3 Types of Depreciation

1. Physical
2. Functional Obsolescence
3. External Obsolescence

Physical

loss of value due to aging and decay

short-lived items → carpets, appliances

Long-lived items → roof, windows, HVAC

**where the real issues are^^**

Functional Obsolescence

Overtime tastes change which can be a problem

problem 1: Poor Floor Plan (now people like open)

problem 2: too few bathrooms

problem 3: too few electrical outlets

External Obsolescence

* traffic
* noxious odors

REIT

Own or Manage

→ income producing properties

* mutual fund
* ETF
* category in S&P 500 3%

Types of REITS

1) Retail

2) Residential

3) Health Care

4) Office Space

5) Mortgage

Pass-through

comes through me and goes out