Equilibrium

RM/FIN 460 - Real Estate Financial Analysis

Instructor

  • Jiro Yoshida

Section 02-1: Purchasing Process

  • Khan Home Buying Process

    • Discussed in the lecture, covering the process of buying a property.

    • Suggested resource: [Khan Home Buying Process](http://drb.gov.ae/img/pdf/Blockchain Project Cart V1.0.pdf)

Section 02-1-1: Title Insurance

  • Definition and purpose are critical as these insurance products are rare.

  • Importance of title insurance in real estate transactions.

Section 02-1-1: Offer Process Example

  • Asking Price: $310,000

  • Offer Made: $300,000

  • Offer Date: 10/15/2015

  • Deposit: $9,000

  • Contingencies:

    • Inspections

    • Financing

    • Title Insurance

  • Closing Date: 12/15/2015

Section 02-1-2: Process of Buying a Property

  • Transaction Costs:

    • Commissions generally amount to 6% of the purchase price.

    • For a typical home sale of $200,000:

      • Listing agent: 1.5% ($3,000)

      • Listing agent's broker: 1.5% ($3,000)

      • Buyer's agent: 1.5% ($3,000)

      • Buyer's agent's broker: 1.5% ($3,000)

Types of Real Estate Professionals

  • Real Estate Agent:

    • Professional licensed to facilitate buying, selling, and renting real estate.

    • Must work under a sponsoring broker or brokerage firm.

  • Broker:

    • More advanced than agents; can work independently and hire agents.

  • Realtor:

    • A licensed agent or broker who is a member of the National Association of Realtors (NAR) and adheres to its strict Code of Ethics.

Performance of Real Estate Services

  • Limited empirical evidence on the efficacy of real estate agents despite high costs.

  • Selling via a flat fee broker may yield 1-4% more before commission, but may increase the time to sale and likelihood of sale completion.

  • Analyzing agent performance:

    • Changing a listing agent from 25th percentile to 75th can increase sales price by 5-6%.

    • Changing buying agents would reduce purchase price by 4-6%.

Section 02-1-2: Contracting

  • Title Search and Insurance:

    • Vital for determining seller's possession of the most current deed.

    • Historical note: Prior to 1677 in England, no written deed was required—physical possession sufficed.

  • Financing Options:

    • Cash purchase vs. mortgage.

  • Closing Process:

    • Completion of the transaction, including deed delivery and possible payment through a third party (escrow agent).

  • Public Recording:

    • Recording acts related to the transaction's public notice.

  • Purchase Contract:

    • Essential details include:

      • Property identification (address, lot)

      • Date

      • Buyer and seller information

      • Price

      • Conditions such as escrow agents and inspections.

Section 02-2: Equilibrium Prices

  • Discussion on Simulating Supply and Demand and references to Adam Smith.

Section 02-2-2: Equilibrium in Housing Market

  • Definition of Equilibrium:

    • The point at which quantity supplied equals quantity demanded.

  • Example of Housing Market:

    • Illustrated with three identical houses, showing the relationship between home price and quantity.

Key Concepts in Market Equilibrium

  • Buyers have unique Reservation Prices; Sellers have unique Willingness to Pay (WTP).

  • Analysis of marginal buyers, pricing impacts, and dynamics around equilibrium points.

Section 02-2-2: Economic Equilibrium Concepts

  • Broad definition across disciplines:

    • Economics: Condition where forces are balanced; no variable changes without external influence.

    • Physics: System's state remains changeable unless impacted externally.

    • Chemistry: Rate of reactions in a system balances out, reaching chemical equilibrium.

    • Biology: Balance of forces leads to stable environmental conditions.

  • Common concepts include:

    • Balance

    • Stability

    • Opposing forces.

Section 02-2-2: Adam Smith’s Invisible Hand

  • Economic well-being might be achievable despite individuals' varying intentions.

  • Influencing factors include:

    • Institutions

    • Price-taking behavior

  • Impediments include market power, public goods, externalities, and information asymmetry.

  • Importance of efficiency is emphasized, but equity remains unaddressed in Smith's theories.

Additional Resources

  • Topics linked to Freakonomics Radio discussing Adam Smith.