Real Estate Economics

[Basic Knowledge for Brokers]

Real Estate Economics is a very important basic knowledge in the profession of real estate brokerage. It gives the broker the philosophy about real estate values. It provides basic knowledge in factors that affect the selling and buying decisions that the broker can use to become an effective negotiator. It will also help the broker see land as an element of social dynamics.

Required YouTube: Bahay (Gary Granada)


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History of Value Theory

* Ancient Romans and Greeks – value of goods absolute, fixed by state and owner

* Mercantilism – value in exchange affected by law of supply and demand, gold: source of all wealth

* Physiocrats – productivity of land, not gold source of wealth; value created by the utility of an item

* Adam Smith – natural price, i.e. the cost of production – value of an item consuming land, labor, capital and coordination

* Austrians – cost of production unimportant, value ios determined by utility of and demand for the last, marginal item

* Today’s concept – value is not objective and absolute, but is subjective and relative to the four forces that create it and the forces that affect it

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Four Essential Elements of Value

* Utility – usefulness; ability to arouse a desire for possession
* Scarcity – a relatively short supply; lack or abundance
* Demand – desire to possess plus the ability to buy; effective purchasing power
* Transferability – the ability to change ownership or use;
marketable title

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Five Distinctions of Real Estate Value

* Value in Use
* Value in Exchange
* Cost – historical figure, a price paid in the past and cost to construct
* Price – value expression in money actually paid
* Value – power of one good to command other goods in exchange; present worth of future benefits

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Factors Affecting Buying Decision

* Location, shape, topography, depreciation, climate condition, soil depth & fertility, size, etc.
* Economic Factors – purchasing power, population density, business & Trade opportunities, inflation or deflation, etc.
* Political and Governmental Factors – monetary and credit policies, taxes and licenses, zoning and building regulations, rent control, etc.

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Factors Affecting Real Estate Value

* Physical Forces

o Natural Resources
o Developed Resources

* Social Forces

o Family size and age-group distribution
o Neighborhood stability and attitudes about property
o Population growth, decline, or shifts at the community, regional and national levels
o Life-styles and living standards, often combined with other forces
o Attitudes about law enforcement, the role of government and individual responsibility
o Attitudes about development, growth and ecology
o Attitudes toward public education

* Economic Forces

o Income level or neighborhood and community residents
o Employment opportunities and trends
o Level of wages
o Availability or money and credit, and interest rate levels
o Price levels and property tax burdens
o Personal savings and investment returns
o General business activity
o Supply and demand in housing
o Production of goods and services

* Political Forces

o Zoning and land-use regulations
o Building and safety regulations
o Environmental protection laws
o Police, fire and health protection services
o Crime preventions, education and recreation services
o Public works; power, water, transportation, sewers and flood control
o Fiscal policy and taxation
o Monetary policy and controlso Government-sponsored urban redevelopment and housing finance programs
o Regulation of industry and business

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Macroeconomic Trends Affecting Real Estate Value

* Economic trends

o National Economic Trends
o Balance of Foreign Trade
o Commodity Price Levels
o Gross National Product

* Business Cycles

o Recovery
o Prosperity
o Stability
o Recession

* Real Estate Supply Factors

o Housing Supply
o New Construction Activity
o The Supply of Vacant Land

* Real Estate Demand Factor

o Population
o Purchasing Power

* National Government Activity

o Housing and Urban Development Programs
o Energy and the Environment
o Government Banking and Monetary Policy
o Fiscal Policy

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The Economic Principles of Valuation

* Principles of Real Estate Marketability

o Principle of substitution
o Principle of conformity
o Principle of progression and regression
o Principle of change
o Principle of supply and demand
o Principle of competition

* Principles of Real Estate Productivity

o Agents of production

+ Labor
+ Coordination (Entrepreneur)
+ Capital
+ Land

o Principles of surplus productivity, balance and contribution
o Principle of increasing and decreasing returns
o Principle of “highest and best use” and consistent use
o Principle of anticipation