Chapter 15 - The Real Estate Market Analysis

Free enterprise system

The open market system in which anyone can participate that both produces and distributes good and services

Four factors of production in a free market system

1. Capital

2. Entrepreneurial ability

3. Land

4. Labor 

Supply

Quantity of an item that is available, or anticipated to be available

Factors that affect real estate supply

• Cost of materials

• Cost of labor

• Cost of construction loans

• Cost of land

• Builder productivity

Relationship between real estate supply and price

Supply increases, prices decrease; When supply decreases, prices increase

Basic measure of demand for residential real estate

Net household formations (or living units);

The net difference between the number of households expected to be created and the number expected to be eliminated over a period of time

Factors that affect real estate demand

• Price

• Income

• Credit

• Population

• Consumer preferences

Relationship between real estate demand and price

Prices increase, demand decreases; When prices decrease, demand increases

Relationship between real estate demand and income

Income increases, demand increases; When income decreases, demand decreases

Relationship between real estate demand and availability/cost of credit

Credit becomes more available (and rates decrease), demand increases; When credit is tight (and rates increase), demand decreases

Relationship between real estate demand and population

Population increases, demand increases; When population decreases, demand decreases

Theoretical condition when supply and demand are in perfect balance

Market equilibrium

A real estate market with more buyers than sellers

Seller’s Market

A real estate market with more sellers than buyers

Buyer’s market

Four phases of the real estate business cycle

Expansion Peak Contraction Trough (valley)

Key market indicators in the real estate business cycle

• Vacancy rates

• Price and sales information

• Number of building permits

Characteristics of the real estate market

• Not homogeneous; each parcel is unique

• Unorganized and inefficient

• Local in nature

Four external factors (externalities) that influence the real estate market

1. Social

2. Economic

3. Governmental

4. Environmental

Aspects of social influences on the real estate market

Population;

The number of people moving in and out of the market, number of deaths, marriages, divorce rates, etc.

Aspects of economic influences on the real estate market

A population’s purchasing power; employment and wage levels, the cost of materials and labor, vacancies, the cost and availability of credit

Aspects of governmental influences on the real estate market

Zoning, building, and health codes; Legislation concerning homestead exemptions, rent controls, restrictions on condos and timeshares, mortgages, etc.

Aspects of environmental influences on the real estate market

Man-made factors such as roads, highways, bridges, airports, and rail lines; Natural barriers such as weather, terrain, soil conditions, and climate

Three physical characteristics of land

1. Indestructible (occupies space on earth, does not depreciate)

2. Immobile (fixed in location)

3. Heterogeneous (no two properties alike)

The value that results from the location of a parcel of land within a community

Situs value;

“Situs” means “fixed as to location”;

A parcel near a school would have a higher situs value than a parcel near a dump

Assemblage

Combining two or more parcels of real estate under the ownership of one party

Four typical stages of a neighborhood

1. Growth

2. Stability

3. Decline

4. Revitalization

Indicators that a neighborhood is growing

Newly cleared land for development or existing properties converted to other uses, economic expansion, low costs and favorable interest rates, sustained demand

Indicators that a neighborhood is stable

Neither growth nor decline, it is no longer profitable to build when other properties are better values, relatively stable values, supply and demand in balance, turnovers low

Indicators that a neighborhood is declining

The neighborhood doesn’t compete with comparable neighborhoods in the same market, maintenance declines, “For Sale” signs appear, more properties for rent, small businesses close

Indicators that a neighborhood is revitalizing

Changing use patterns, preferences, and migration pattern, buildings demolished for newer structures, community redevelopment, younger people and families purchase properties

Gentrification

Revitalization in older neighborhoods in areas that have lost favor in the market, when younger single people and families purchase and rehabilitate or renovate property

Highest and Best Use

Legal use for a parcel of real estate that generates the most return on the land and any improvements (the building) compared to alternative uses

The four criteria, applied sequentially, to determine the highest and best use of a parcel

1. Legally permissible

2. Physically possible

3. Financially feasible

4. Maximally productive

Plottage

Two parcels combined into one have a higher value than separately