Transcript Slide 1

RES 220 Presentation Slides
Real Estate Economics – October 5, 2009
• Introduction by Individual Attendees and the
Backgrounds & Goals of Class Members
• Discussion of Goals Specific to
Individual
Learning Objectives
• Weekly Class - Sample Schedule
• Review of Text Outline - Chapters 1 & 2
• Introduction to Len Johnson’s Background
• Break 7:30 – 7:45
• Review of Chapters 3 & 4
Class Introductions
Introduction by Individual Attendees and the
Backgrounds & Goals of Class Members
Additional Class Goals
Discussion of Supplemental Learning Objectives
Real Estate Economics
Weekly Class Schedule
• Review & Discussion of Economics Derived from
Real Estate Periodicals (15 -30 minutes)
Local Impacts due to changes in International, National
Economics & Business and the impacts on Local Real
Estate Economic Issues;
• Review of Topics from Assigned Reading
• Guest Speakers
• Other Real Estate Topics from Individual/Class
Objectives such as Real Estate Valuation and
Acquisition strategies (such as Chapter 16)
Guest Speakers
October 12– Economic Features Real Estate
- Allen Safer, MAI – Managing Director
Integra Realty Resources
October 19 – Economic Trends Northwest
- Review of Michael Parks – Marples Pacific Newsletter
Presentation
October 26 – Housing and Federal Financing
- Guest Speaker, Federal Home Loan Bank
November 9– “Land Use, Economic Issues & Public Policy”
- – Guest Speaker- Economic Development
City of Renton / Boeing 300 Acre Redevelopment Plan
December 13th - Current Status “Career Opportunities”
- Jeff Harris, Harris & Associates & Pacific Capital Advisors
Real Estate Economics
Review of Textbook
&
Reading Material
Supplemental Reading Material
- Edge City by Joel Garreau
- Schizomania by Jack Lessinger
Real Estate Economics
Overview
Part One - Basic Economic Background for
Real Estate Analysis
Part Two - Understanding Real Estate Markets
Part Three - Major Influences on Real Estate
Development
Part Four - Real Estate Investment The Economics of the Parcel
Part One - Basic Economic Background for Real
Estate Analysis
• Introduction to Real Estate Economics
• Review of the Economic Principles of
Capitalism
– Basic Economic Concepts
– Economic Principles in Action
– Markets and Prices
Part One - Basic Economic Background
for Real Estate Analysis
• Government’s Role in the Economy
– The Real World of Markets and Government
– Measuring the Performance of the Economy
– Changes in Economic Activity
– Government Tools to Fight Economic Problems
• Money, Credit, and Real Estate
– The Supply of Money
– The Federal Reserve System
– The Actions of the Federal Reserve & Impacts on
Real Estate
Part One - Basic Economic Background for Real
Estate Analysis
• Important Economic Features of Real Estate
– Economic Characteristics of Real Estate
Markets
– How the Real Estate Market Reacts to Changes
in Demand
Part Two - Understanding Real Estate Markets
• Six Chapters - Regional, Community and
Neighborhood Analysis;
• Objective: Evaluate why local and regional
economics change and how these changes
are reflected in the real estate market;
Part Three - Major Influences on Real Estate
Development
• Chapter on each of Four Topics, Generally
considered Controversial Issues in Real Estate:
– Real Estate Taxation
– Land-use controls
– Real Estate Development Procedures
– Required Government Reports
Part Four - Real Estate Investment The Economics of the Parcel
• Utilizes previous text and study to:
– Demonstrate how the principles of Real Estate
Economics can be utilized to analyze specific
properties
– Topics include:
• Investment principles
• Cash flow analysis
• Income tax aspects
• Forecasting trends
Review of Chapters 1 & 2
Review Real Estate Economics*
“How Industry Professionals Evaluate
& Consider Real Estate Economic
Indices ”
*National Association of Industrial Office Parks “NAIOP”
4th Quarter – 2003 Meeting and
Presentation
Chapter One
Introduction of Real Estate Economics
• Economics is the science that is concerned
with how individuals and societies choose to
use resources to produce, distribute, and
consume goods and services.
• Real estate is defined as land, to which is
affixed to the land, that which is appurtenant
to the land, and which is immovable by law.
Chapter One
Introduction of Real Estate Economics
• Real estate economics is the study that uses
economic principles, both macro and micro,
to analyze the impact that national,
regional, community and neighborhood
trends have on real estate values.
• Real estate economics is the link between
general economic theory and applied real
estate practice.
(Neither the study of general economics nor a
course in the practice of real estate)
General Overview
General
GeneralEconomics
Economics
Principles &
Theory
Principles
and
Theory
Real Estate
Economics
Real Estate
Principles
& Theory
The field of Real Estate Economics draws principles from both general economics and
real estate practice.
Chapter One
Introduction of Real Estate Economics
• Why study Real Estate Economics?
Chapter One
Introduction of Real Estate Economics
• Reasons we study Real Estate Economics:
– Reasons for change in land use and values;
– How to anticipate change
– How change is measured - valuation
– Supports the understanding of the impact of
real estate decisions and related actions will
have on real estate values.
General Overview of Course & Text
• Part One - “Basic Economic Background for
Real Estate Analysis”
“Stairway of Real Estate Economics”
a.k.a. Stairway to “Real Estate Heaven”
Final Real Estate Decision
Investment Analysis
Government’s Role in the Economy
Taxes, Land Usage and Environmental
Real Estate Market Analysis
Regional and Community Analysis
Real Estate and the National Economy
Government’s Role in the Economy
Basic Economic Principles
Chapter Two - Review of the Economic
Principles of Capitalism
Economics Revisited
– Economics attempts to determine how scarce
goods and services can be distributed
efficiently;
– Choice and Opportunity Cost
• A key concept is the choice between scarce
resources and competing uses;
• Every choice incurs a cost;
– Role of Economist to examine alternate
solutions to scarcity problems
Chapter Two
Review of the Economic Principles of Capitalism
• Principles of Capitalism
–Private Property - Rights of individual
–Private Enterprise - Resources and
Business owned by private citizens
–Competitive Markets - Numerous buyers and
sellers with goods allocated to lowest price
–Profit Motive - Provides motivation and most
often results in efficiency in markets
–Laissez Fiare - Non-interference by government
Chapter Two
Review of the Economic Principles of Capitalism
U.S. - Mixed Capitalism - Intersection of private
enterprise and government involvement
• Market Economy
– Mixed Capitalism versus Pure Capitalism
• Command Economy
– Pure Socialism versus Mixed Socialism
Chapter Two
Review of the Economic Principles of Capitalism
Reviewing our Understanding
Basic Economic Concepts
• What is the definition of economics?
• What does an economic system attempt to
do?
• What is government’s role under
capitalism? Under Socialism?
Chapter Two
Review of the Economic Principles of Capitalism
1)
2)
3)
4)
Factors of Production
Land - Natural Resources
Labor - Human Effort
Capital - Money and operating equipment
Entrepreneurship - Production effort
“going into business”
Chapter Two
Review of the Economic Principles of Capitalism
• Capitalism - Private
– Rent, Wages, Interest, Profit and Income
• Circular Flow of the Economy
Circular Flow of the Economy
Chart
Demand----Resource Market---Supply
Factors of Production
Business
Sells Goods
& Services
Individuals
&Households
Product Market
Demand----
Goods & Services ---- Services
Chapter Two
Review of the Economic Principles of Capitalism
Reviewing Our Understanding
Circular Flow of the Economy
1 - Business experiences a decline in sales and
decides to cut back on production. Will the
economy rise or decline? Will household income
increase or decrease?
2 -What will happen if this flow if the reverse takes
place and high profits motivate business to
expand its output? (figure 2.2)
Chapter Two
Review of the Economic Principles of Capitalism
Markets and Prices
– Definition of a market: “Place where
buyers and sellers meet to bargain and
exchange items of value at a negotiated
prices”;
– Markets with Perfect Competition
• Equal number of buyers and sellers;
– Markets with Imperfect Competition
• Imbalance between buyers and sellers;
Chapter Two
Review of the Economic Principles of Capitalism
Markets and Prices
– Demand and Supply
• Classic Answer to Price Determination
• Law of Demand
–The lower the price, the more
consumers will buy;
–The higher the price, the less they
will buy.
Chapter Two
Review of the Economic Principles of Capitalism
Markets and Prices
Changes or Shifts in Demand
• An increase or decrease in population
• An increase or decrease in per capita income
• Changes in consumer taste and substitute products
• The amount of credit available
• The effect of advertising
Chapter Two
Review of the Economic Principles of Capitalism
Markets and Prices
Supply
• The total quantity that sellers are willing to sell at
prices increase and fewer as prices decrease
– Higher prices may mean higher profits, resulting in
increased output;
– Decreased prices, profits usually decline, and
businesses cut back on output;
Chapter Two
Review of the Economic Principles of Capitalism
Markets and Prices - Changes or Shifts in Supply
• Supply, like demand, reflects changing
circumstances:
1) Changes in the cost of the factors of production;
2) A change in demand for one product can cause a
change in supply of another product;
3) Business anticipation of future prices and profits can
change the amount of goods supplied.
Chapter Two
Review of the Economic Principles of Capitalism
Markets and Prices -Supply and Demand
• Supply and Demand together determine output
and price levels:
• Equilibrium Point
– Prices settle at the point where the quantity the
buyers are willing to purchase equals the quantity that
sellers are willing to sell;
Chapter Two
Review of the Economic Principles of Capitalism
Markets and Prices -Supply and Demand
International Trade Concepts
1) Free Trade
2) Principle of Competitive Advantage
3) Balance of Payments
4) Balance of Trade
5) Rate of Exchange
6) Importing and Exporting
Chapter Two
Review of the Economic Principles of Capitalism
Reviewing Your Understanding - Markets & Prices
• If supply stays the same but demand decreases, what
will happen to price? To the amount supplied?
• If the demand remains the same but supply increases,
what will happen to price? To the amount supplied?
• If the main industry in your town goes out of business,
what effect will this have on the price of homes? In
terms of supply and demand, what has occurred?
Chapter Three
Government’s Role in the Economy
Goals:
• Discuss why government’s role in the U.S.
Economy has been expanding;
• Define Gross Domestic Product and label the
phases of the Business Cycle
• Describe the trend in national Real Estate Cycles
• Define and explain the two main tools used by
the Government to fight economic problems
Chapter Three
Government’s Role in the Economy
• Imperfect markets arise when groups of
buyers and sellers are able to influence
prices and output of goods or services;
• U.S. Government has regulated business
– 1890’s Antitrust Acts to regulate business
– 1897 Interstate Commerce Commission
– 1980’s transition to deregulation of
Financial and Transportation Industries
– 1990’s transition back to more regulation
Chapter Three
Government’s Role in the Economy
Arguments made by those in favor of more Regulation:
• Government regulation “assures competition”
• Government regulation assures defense capacity
• Government needs more resources to allocate to
social objectives rather than depend on non-profits
• Government should manage the economy to “fight”
inflation, recession and unemployment
Chapter Three - Government’s Role
Measuring the Performance of Economy
• Measurement of Economic Performance
– Gross Domestic Product “GDP” =
The total market value of all goods and services
produced domestically in the United States during a
period, normally measured in calendar year.
Chapter Three - Government’s Role
Measuring the Performance of Economy
• Measurement of Real GDP
– Doesn’t factor-in foreign manufacturing of
domestic consumption;
– Net of inflation
Chapter Three - Government’s Role
Measuring the Performance of Economy
Income Measurements:
• Personal Income: Personal Income net of business
taxes, before personal taxes;
• Disposable Personal Income: Income after
payment of personal taxes;
– Generally a good indicator of purchasing power;
• Discretionary Income: Amount available after
paying necessities;
Chapter Three - Government’s Role
Measuring the Performance of Economy
Changes: in GDP, personal income, disposable
personal income and discretionary income
important as an indicator for real estate
investment.
• May enhance consumption capacity;
• May encourage refinancing and greater capacity
for personal debt and real estate debt financing;
Chapter Three - Government’s Role
Measuring the Performance of Economy
Foreign Ownership of Real Estate:
• Expansion and Contraction during the 1990’s due
to economies;
– Flight of Capital due to Political Stability - 1989 China
– Value of the U.S. Dollar relative to other currencies
– Potential for higher yields - Budget moving toward
Balance with stronger U.S. Dollar
Chapter Three - Government’s Role
Measuring the Performance of Economy
Foreign Ownership of U.S. Businesses & Real Estate
Expansion and Contraction Examples
1980’s Japanese - Excess liquidity
1989 - Flight of Capital from Asia/Pacific & Taiwan
due to Political Stability - 1989 China
1993 - Japanese start liquidating U.S. Holdings
to support financial crisis combined with
drop in U.S. Real Estate Values
Years 2004 - 2005
• Residential Markets Continued Upward
Trend In Supply & Demand
• Individual Homeowners Utilized their
Homes to Finance Spending;
• Low Interest Rates Accelerated Demand;
• Car Manufacturers Provided Zero Percent
Financing to Increase Sales;
• President & Policy Makers Supported
Higher Percentage of Homeownership
Years 2006 - 2007
• Residential Markets began to Correct
• Supply of Residential Housing Exceeded
Demand;
• Mortgage Backed Securities Continued to
be Sold Into the Worldwide Market
Chapter Three - Government’s Role
Measuring the Performance of Economy
Foreign Ownership of U.S. Businesses & Real Estate
Expansion and Contraction Examples
• Value of the U.S. Dollar relative to other currencies
• Potential for “safe-haven” higher yields • Budget Deficits – Mid-decade Warren Buffet began
“selling” U.S. Dollar due to various domestic and
international reasons
Chapter Three - Government’s Role
Measuring the Performance of Economy
Ownership of U.S. Businesses & Real Estate
• Value of the U.S. Dollar relative to other
currencies - currently dropping against world
currencies; (disincentive for U.S. Real Estate)
• U.S. Budget Deficits - Warren Buffet currently
moving capital into international market by
“selling” U.S. Dollar in favor of investing in U.S.
domestic businesses
• U.S. Trade Deficit - Growing at rapid pace
Chapter Three - Government’s Role
Measuring the Performance of Economy
Changes in Economic Activity - Business Cycle
• Business Cycle: Recurrent expansions and
contractions in general business activity, generally
over a period of two to six years;
• Most recent - Longer-term cycle - Stock market
expansion early 1990’s through March - 2000;
• Again through 2007
• Correction Since 2007 from Dow 14,000 to 6,500
Dow Jones 1973 to Oct 1-2009
Chapter Three - Government’s Role
Measuring the Performance of Economy
Changes in Economic Activity - Business Cycle
• Real estate cycles generally impacted by business
cycle and other governmental actions:
• 1974 - High interest rates, slower demand
• Late 70’s acceleration of demand
• 1980 - High interest rates, slow demand for most real
estate segments;
• 1986 - Change in tax policy, drop in real estate values
• 2000 - Government policy of low interest rates drives
liquidity, home refinancing and increase in values.
Chapter Three - Government’s Role
Measuring the Performance of Economy
Business Cycle
Graphic
• Prosperity, Recession, Depression and Recovery
• Alternative theories - Jack Lessinger, PhD
Chapter Three - Government’s Role
Measuring the Performance of Economy
Business Cycle - Causes
• War and International Conflicts;
• Emergence of new industries;
• Varied consumption and savings patterns by consumers;
• Changes in amount of money and credit in circulation;
• Psychological aspects of consumers and business
investors
Chapter Three - Government’s Role
Measuring the Performance of Economy
Business Cycle - Economic Forecasting
• Reduces inherent uncertainty;
• More “art” than science
Chapter Three - Government’s Role
Measuring the Performance of Economy
Real Estate Cycles - (Later in More Detail)
Examples:
• Commercial office demand - Complex issues of
supply and demand tied to business climate and
financing;
• Housing - Demand and supply impacted by
consumers and relative cost of financing and
impact of interest rates on occupancy costs;
• Regional diversity associated with local markets
Economic health - Seattle versus San Diego
Chapter Three - Government’s Role
Measuring the Performance of Economy
Government Tools to Fight Economic Problems
• Fiscal Policy: Government use of taxes and
spending to help counteract recession,
unemployment and inflation;
• Monetary Policy: Government strategies to
increase or decrease the money supply in the
attempt to stabilize the economy to counteract:
recession, unemployment and inflation
Chapter Four - Money, Credit
& Real Estate
Money & Credit: Critical Effect on Real Estate
• Money supply: Generally in the form of
demand deposits
• Monetary Policy: Government strategies to
increase or decrease the money supply in the
attempt to stabilize the economy to counteract:
recession, unemployment and inflation
Chapter Four - Money, Credit
& Real Estate
What is Money?
•
•
•
•
Money is a medium of exchange;
Money is a measure of value;
Money is a store of value; and
Money is a standard of deferred payment.
Chapter Four - Money, Credit
& Real Estate
Goal for this Chapter
• Explain what money is and describe how banks
and other depository institutions create money;
• Understand the purpose of the Federal Reserve
System
• Money is a store of value; and
• Money is a standard of deferred payment.
Chapter Four - Money, Credit
& Real Estate
Money
• Coins, currency and checking accounts;
• Demand Deposits --- 73% checking accounts;
• Depository Institutions- “Create Money”:
- Fractional Reserves (Ratio of reserves to available for
loans);
- Federal Deposit Insurance - $100,000;
• Classifications of Money Supply
• M1 versus M2 .
Chapter Four - Money, Credit
& Real Estate
Money
• Classifications of Money Supply
• M1 versus M2
• M1 = coins, paper money and demand deposits
M2= M1 plus liquid accounts (savings, CD’s and
money market accounts)
M3= M2 + large CDs over $100,000
Chapter Four - Money, Credit
& Real Estate
Money & Inflation
• Expansion of Money Supply
• Interest Rates tend to drop
• Excess can result in inflation
• Constricting money supply can artificially
impact liquidity; and
• Too much liquidity can result in increased
demand and inflation can be a result.
Chapter Four - Money, Credit
& Real Estate
Inflation – Two Types
• Demand – Pull Type
• Cost – Push Type
Chapter Four - Money, Credit
& Real Estate
Reviewing Our Understanding
• How has the Federal Deposit Insurance Corporation
(“FDIC”) strengthened our banking system?
• If all banks keep 10% of deposits in reserve what is the
maximum deposits and loans that can be generated if a
new deposit is taken into the system?
• If the economy is in recession, and assuming you had a
the power would you increase or decrease the
percentage of reserves that banks must keep to back
each deposit? Why?
• How can to much money create inflation? What
problems does this cause for real estate brokers?
Chapter Four - Money, Credit
& Real Estate
Federal Reserve System
• Regulates the Money Supply and credit;
• Established in 1913 with 12 Regional Banks with a
seven member board of Governors;
• Refer to Figure 4.1
• The “Fed” controls bank reserves by using the
following tools:
• Changes in reserve requirements
• Open Market Operations;
• Changes in the Discount Rate;
Chapter Four - Money, Credit
& Real Estate
Federal Reserve System – Controls over Money Supply
• Reserve Requirements
•
Fed has the right to vary the percentages within certain
ranges;
• Fed can constrict money supply to “slow inflation by
reducing the amount of spending”
•
Open Market Operations
• Fed is allowed to buy and sell Government Securities
• Purchase - Impact of producing more liquidity in the market
• Sells securities – Decreases liquidity and available credit;
Chapter Four - Money, Credit
& Real Estate
Federal Reserve System – Controls over Money Supply
• Changes in the Discount Rate
• Amount Fed Charges member institutions for credit
• By decreasing discount rate , Fed can generate
additional liquidity;
• By increasing discount rate, Fed can decrease the
amount of money available for loans;
• What happened during the 1929 Stock Market Crash;
• What happened during the collapse of Long Term
Capital Corporation in 1998?
Chapter Four - Money, Credit
& Real Estate
Federal Reserve System – Controls over Money Supply
• Federal Funds Rate =
Overnight deposit rates between banks;
• Federal Reserve can increase liquidity by allowing
federal funds rate trading range to expand, thus
encouraging inter-bank borrowing;
• Conversely, Federal Reserve can decrease liquidity by
constricting trading range of inter-bank borrowing.
Chapter Four - Money, Credit
& Real Estate
Federal Reserve System – Summary
• Increase in Money Supply –
•
•
•
•
Decrease reserve requirements;
Buy Government Securities;
Decrease the Discount Rate;
Or….Some combination of all the foregoing.
Chapter Four - Money, Credit
& Real Estate
Federal Reserve System – Summary
• Decrease in Money Supply –
•
•
•
•
Increase reserve requirements;
Sell Government Securities;
Increase the Discount Rate;
Or….Some combination of all the foregoing.
• Decrease or Increase can also be enhanced by
raising or lowering the Federal Fund rate.
Chapter Four - Money, Credit
& Real Estate
Foreign Capital - Challenges
•
Impact of Budget Deficits and Currency Risk–
• Sale of U.S. Government Bonds to foreign investors
historical short-term solution to budget deficits;
• U.S. Government attempts to influence world
financial markets to maintain competitive U.S.
Government Bonds;
• Domestic liquidity impacted by the international
demand for U.S. Bonds (i.e., currency risk and
higher U.S. interest rates);
• IMF – January, 2004 - Critical of U.S. policies
including Budget Deficits.