Transcript Real Estate and the Economy

Real Estate and the Economy
Nightly Trivia
Q) What is considered one of the slimmest
buildings ever designed?
 A) The Carnegie Hall Tower, designed by
Cesar Pelli, is only 50 feet wide and 60
stories high
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Real Estate and the Economy
Economic base
 Demand
 Government policies
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Economic Base for Property
Survival – a region must export goods and
services to support trade
 Economic base – ability to produce a
commodity or service that can bring in money
from outside its area
 Base, export, or primary industries – industries
that produce goods and services for export
 Service, filler, or secondary industries –
producers of goods and services that are not
exported
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Land Values
Base industries matter – land is immovable
 Diversity of base industries reduces risk of
variability
 Employment multiplier – generally, every 1
job in a primary industry supports 2 jobs in
local service industries
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Housing Demand – Short-term
Market cycles are relatively unpredictable
 Physical adjustments to market changes are
slow
 Price adjustments to market changes can be
rapid and dramatic
 Changes in housing construction alternate in
a stair-step pattern based on changing
demand
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Housing Demand – Long-term
Long-term demand predictions are based on
population size and growth by age group
 Earning patterns based on a generation’s
age indicate what level demand will be at in
the future
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Government Impact
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Taxes – tax breaks on interest paid, property
taxes paid, etc. have long served to
encourage home ownership
Tax Acts
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1986:
Repealed capital gain
exclusion
Repealed accelerated
depreciation on real
estate
Extended minimum
depreciation periods
Placed limits on
deductible real estate
losses
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1997:
Reinstated capital gain
exclusion
Granted exclusions from
income for sales of
personal residences
Fiscal Policy (loan money)
Because most people can’t pay cash for
houses, loan rates and availability are very
important
 Many industries are impacted by the
housing market, which hinges on fiscal
policy
 Generally, if the federal government lives
within its means interest rates will decrease
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The FED
The federal reserve board sets monetary
policy – it can create and destroy money
 Mechanisms:
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– Open-market purchase of Treasury securities
– Changes in the discount rate to banks
– Changes in the reserve requirements of banks
Money Creation and Destruction
Short-term, increasing the money supply
drops interest rates, which generates more
purchasing
 Long-term, increasing the money supply
increases inflation, which decreases
purchasing power
 In times of inflation, people invest in hard
assets such as homes and property
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What is Inflation?
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Cost-push inflation – the increasing cost of inputs
necessary to manufacture a product or offer a service
Demand-pull inflation – buyers bid against each other
to buy something that has been offered for sale
Monetary inflation – results from the creation of
excessive amounts of money by government
Real-cost inflation – caused by the increased effort
necessary to produce the same quantity of a good or
service
Recent history (1975-2000)
Housing prices doubled and tripled in many
places
 The baby boom generation greatly
expanded the housing market
 Inflation adjusted cost of interest lagged
behind inflation during the 70’s
 70’s wage increases were pushing people
into higher tax brackets and making interest
deductions more attractive
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Slowing Down
The federal government placed tighter
restrictions on lending to slow inflation by
1980
 These regulations prevented many loan
renewals which created problems for
lenders compounded with falling property
values in many areas
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Owner-Occupants
Housing is very different than other real
estate ventures
 Because owners are often the occupants,
their primary concern is with living
benefits, not appreciation of the investment
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More About the FED
Monetary base – legal reserves of banks at
the Federal Reserve plus cash in the hands
of the public
 Objectives for the American economy
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– High employment
– Stable prices
– Steady growth in the nation’s productive
capacity
– A stable foreign exchange value for the dollar