Transcript Essentials of Real Estate Economics

©2011 Cengage Learning
Chapter 5
IMPORTANT ECONOMIC FEATURES OF REAL
ESTATE
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Economic Characteristics of Real Estate Markets
Market: a place where buyers and sellers meet to
exchange items of value.
In a perfect competitive market:
 There are numerous buyers and sellers
 Buyers and sellers are knowledgeable and free to move
in or out of the market.
 No party has control over the market
 Buyers seek the lowest prices
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In Real Estate Markets:
 supply is fixed in the short run.
 cannot respond quickly to changes in the market
conditions.
 nonetheless, supply and demand are still an important
factors.
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Characteristics
 The total amount of land is fixed
 The intensity of land use can be increased
 The process of increasing density requires a substantial
amount of time and money.
 In the short run market prices and rents will be
determined by local changes in demand.
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Perfect Markets
 Many Participants
 All products are alike and interchangeable
 Item purchased are small, relatively inexpensive, &
purchased frequently.
 Government plays little if any role; Laissez-Faire
prevails.
 Prices are established by the smooth interaction of
supply and demand.
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Typical Real Estate Markets
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Few participants
Buyers and sellers are not knowledgeable
Each parcel of Real Estate is unique & no two are alike
The location is fixed
Real Estate is purchased infrequently (rarely more than four
or five times).
 Government plays a dominant role in Real Estate
development through fiscal and monetary tools and zoning,
environmental, and health codes.
 Prices are influenced by supply and demand; a lack of
knowledge by either the buyer or seller can distort the price
paid.
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How the Real Estate Market Reacts to Changes in Demand
An increase in demand for real estate will:
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Reduce existing vacancies of most housing types.
Rents and prices will increase.
More product will be built because of increased profits.
Supply of new product will grow slowly.
Vacancies will begin to rise as increased supply catches up
to demand.
 Increased vacancies cause a fall in rents and prices.
 As the market adjusts to lower rents and prices, profits will
decrease squeezed between rising costs and falling sale
prices.
 As profits fall, production will decline.
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Decreased demand for Real Estate will:
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Increase vacancies
Will cause rents and prices to decline
Move people into more spacious accommodations
Cause market segments that cannot compete to
abandon or demolish improvements.
 Remain in this state until demand once again increases.
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Changes in demand are caused by:
 Population
 Income
 Availability of mortgage credit
 Personal lifestyles
 Governmental actions
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The advantages of Foreign Ownership of U.S. Real Estate:
 Generates income & is distributed into the economy
 Provides tax revenue
 Generates income for Real Estate professionals
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The disadvantages of foreign ownership:
 United States becomes less self-sufficient
 Gives the government less incentive to solve
budget problems.
 High prices due to increased demand keep local
investors out of the real estate market.
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Real Estate Professionals can provide the
following services:
The Role of the Real Estate Professional
 Provide current market information
 Advise clients and customers
 Provide advise on financing
 Help close real estate transactions
 Encourages selling & buying, making a more active
market.
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Supply Curve
Equilibrium Price
(Point)
(Price) P
Demand Curve
Q (Quantity)
Demand and Supply in Equilibrium
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Demand changes are caused by:
 Population
 Income
 Personal tastes
 Credit
 Substitute projects
 Advertising
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Supply changes are caused by:
 Cost of production
 New technology
 New construction
 Demolition
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Graphs of the demand and
supply curves show how the
quantity varies with price. These
graphs are a useful tool, to help
understand
the
impact
of
economic change on prices.
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Demand Curve
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Movement Along the Demand Curve
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Supply Curve
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Movement Along the Supply Curve
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Demand and Supply in Equilibrium
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Shift in Demand
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Shift in Supply
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Shift in Demand
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Shift in Supply
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Increase in Demand, Supply Curve Remaining the Same
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Decrease in Demand, Supply Curve Remaining the Same
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Increase in Supply, Demand Curve Remaining the Same
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Decrease in Supply, Demand Curve Remaining the Same
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Real Estate Demand Curve with a Short-Run Fixed Supply
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Increase in the Demand for Real Estate with a Short-Run Fixed Supply
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Decrease in the Demand for Real Estate
with a Short-Run Fixed Supply
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