RES 220 Presentation Slides. Real Estate Economics – October 5, 2009 Introduction by Individual...

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 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

PresentationOctober 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 PlanDecember 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 EconomicsOverview

Part One - Basic Economic Background for Real Estate Analysis

Part Two - Understanding Real Estate MarketsPart Three - Major Influences on Real Estate

DevelopmentPart Four - Real Estate Investment -

The Economics of the Parcel


• Introduction to Real Estate Economics• Review of the Economic Principles of

Capitalism– Basic Economic Concepts– Economic Principles in Action– Markets and Prices


• 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


• 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 Economics

Principles & Theory

General Economics

Principles and TheoryReal EstateEconomics

Real Estate Principles & Theory

The field of Real Estate Economics draws principles from both general economics and real estate practice.


• Why study 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”

Basic Economic Principles

Government’s Role in the Economy

Real Estate and the National Economy

Regional and Community Analysis

Real Estate Market Analysis

Taxes, Land Usage and Environmental

Government’s Role in the Economy

Investment Analysis

Final Real Estate Decision

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 TwoReview 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


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


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?


Factors of Production1) Land - Natural Resources2) Labor - Human Effort3) Capital - Money and operating equipment4) Entrepreneurship - Production effort

“going into business”


• Capitalism - Private – Rent, Wages, Interest, Profit and Income

• Circular Flow of the Economy

Circular Flow of the EconomyChart

Demand----Resource Market---Supply Factors of Production

Business Individuals Sells Goods

&Households& Services

Product MarketDemand---- Goods & Services ---- Services


Reviewing Our UnderstandingCircular Flow of the Economy1 - 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)


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;


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.


Markets and PricesChanges 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


Markets and PricesSupply• 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;


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.


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;


Markets and Prices -Supply and DemandInternational Trade Concepts

1) Free Trade2) Principle of Competitive Advantage

3) Balance of Payments 4) Balance of Trade 5) Rate of Exchange

6) Importing and Exporting


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


• 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


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 RoleMeasuring 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.


• Measurement of Real GDP–Doesn’t factor-in foreign manufacturing of

domestic consumption;–Net of inflation


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;


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;


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


Foreign Ownership of U.S. Businesses & Real EstateExpansion and Contraction Examples

1980’s Japanese - Excess liquidity1989 - Flight of Capital from Asia/Pacific & Taiwan due to Political Stability - 1989 China1993 - Japanese start liquidating U.S. Holdings

to support financial crisis combined withdrop 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


Foreign Ownership of U.S. Businesses & Real EstateExpansion 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


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


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


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.


Business Cycle Graphic

• Prosperity, Recession, Depression and Recovery• Alternative theories - Jack Lessinger, PhD


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


Business Cycle - Economic Forecasting• Reduces inherent uncertainty;• More “art” than science


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


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


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.


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.


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 .


Money

• Classifications of Money Supply • M1 versus M2

• M1 = coins, paper money and demand depositsM2= M1 plus liquid accounts (savings, CD’s and

money market accounts)M3= M2 + large CDs over $100,000


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.


Inflation – Two Types• Demand – Pull Type• Cost – Push Type


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?


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;


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;


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?


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.


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.


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.


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.

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