Chapter 12 Flashcards

Question

Economic Forces

Answer 1

Economic forces are the second major category of external forces that influence real estate values. There is also a long list of possible items in this category. Economic forces tend to be the most powerful and exert the most influence on value of any of the four categories. Once again, the list is not all-inclusive but might include: National economy Consumer Price Index Interest rates Availability of financing Wage rates Types of employment Unemployment rates Cost of construction Rental rates Rental vacancies Expense levels

Answer 2

The state of the national economy can have an impact on local real property values. Are we in a recession or a boom time? We talked earlier about real property cycles and how the economy tends to move up and down in relatively similar historical patterns. Is the economy expanding? Is the stock market going up? Are people generally optimistic? All these factors tend to inspire confidence and spur spending in the economy. What's happening with the national debt? What is the state of the U.S. dollar versus the rest of the world currency? What's the cost of a barrel of oil? All these kinds of factors are remote from the local situation and yet ultimately they can trickle down and affect the value of local real estate. If the price of gasoline gets too high, there may be a slow down on new subdivisions that are being planned a long commute away from employment opportunities. It also may hurt the second home market, where people may no longer want that two or three hour drive to their vacation getaway.

Answer 3

The Fed, at its quarterly meetings, always takes a hard look at inflation figures. Sometimes it will raise interest rates slightly as part of its continuing battle to keep inflation in check. It's a delicate balancing act, because they typically want to keep interest rates low so that mortgage borrowing is affordable. The Fed, at its quarterly meetings, always takes a hard look at inflation figures. Sometimes it will raise interest rates slightly as part of its continuing battle to keep inflation in check. It's a delicate balancing act, because they typically want to keep interest rates low so that mortgage borrowing is affordable.

Answer 4

The topic of interest rates is rather complex because of the interlocking effects on so many aspects of our economy. Let's start with the obvious. We mentioned that most homeowners need to take out a mortgage in order to buy a home. If interest rates are low, it encourages mortgage borrowing. However, if the interest rates go up, it forces some people out of the market and slows the effective demand for home purchases.

Answer 5

The loan to value (LTV) ratio is an important factor. And the availability of mortgages. In times of tight supply, you may have to put 20 or 30% down in order to buy a house. This removes many potential purchasers from the market and decreases the effective demand for properties in an area.

Answer 6

Wage rates in an area are another item of interest. It can't be much more basic than that. The more you make, the more you can afford. You'll find a direct correlation between average family earnings in an area and housing prices. A lot of it is related to the multiplier effect I mentioned earlier. If I can afford a mortgage payment up to 30% of my annual income, this means the more I make, the more I can borrow, and therefore the more I can afford to pay for a house.

Answer 7

Beyond the nitty-gritty of actual dollars of wages, we need to consider the types of employment that are available in an area. Is the primary employment heavy industry or manufacturing? Is it high-tech professional employment? Agricultural? Government work? Educational facilities? Basic industries consist of the major employers in an area. They are net importers in that they produce goods that are shipped outside the region and bring more money back into the region. Basic industries consist of the major employers in an area. They are net importers in that they produce goods that are shipped outside the region and bring more money back into the region. Service industries are those which produce services rather than goods. People in the service industry would include real estate brokers, appraisers, insurance agents, restaurant owners and auto mechanics. Much of the service industry income comes from money earned by people in the basic industries. There is a multiplier effect in that each job in a basic industry supports two to three jobs in the service industries.

Answer 8

Unemployment rates are another general measure of the health of the economy. In the United States, an optimal unemployment rate is around 3% to 4%; this would represent "full employment". (Some economists disagree, stating that the full employment number is closer to 5%.) It is almost impossible to get it any better than that due to issues of frictional unemployment (people voluntarily changing jobs). In the last few years some areas have been able to sustain an unemployment rate around 6%. In other areas, you may find 10%, 12% or more. Those would generally be unhealthy numbers.

Answer 9

Obviously, when valuing residential real property, local employment trends are more important than national trends. An area may be doing very well, for example it may boast an unemployment rate of 3%, bucking the national trend. That area is likely to have a healthy housing market. Or conversely, an area may be really struggling, with an unemployment rate of 12% or more. It is likely that this area would have an oversupply of available housing, and declining property values. Is the employment in an area permanent or cyclical? In some areas construction work is very busy in the summer and dries up in the winter months. Some areas have job opportunities primarily in the summer season (at a beach or lake) or in the winter season (a ski resort). You might encounter 5% unemployment in the busy season and 10% at other times of the year. Are some jobs transient? Areas around military bases are subject to fluctuations as thousands of military personnel are shuttled in and out. The service industries nearby may expand and contract accordingly. The workers at the nearby gas stations, pizza parlors and movie theaters may periodically get laid off or hired back. What are the trends in your area? Are layoffs predicted in some of the basic industries? Or are local employers hiring? It is a constant effort to keep informed; read the newspapers, utilize appropriate online sources, talk with people in the know; or drop in at the local chamber of commerce or planning agency. And remember - things could change tomorrow. If unemployment rates are high, it can affect the housing market. People are not going to be buying houses if they are out of work. The market may get flooded with foreclosed houses, and depress prices further. Businesses may suffer as well as a decrease in people's purchasing power.

Answer 10

The total cost of construction in an area, be it residential or commercial construction, is really an amalgam of three factors: Land costs Materials costs Labor costs In some areas of the country, land has become exceedingly expensive. It can put the brakes on new construction, particularly for affordable housing. Materials costs typically do not vary that much from area to area, as they are usually mass produced by various manufacturers. Sheets of plywood or bundles of roofing shingles generally cost roughly the same amounts to manufacture. The difference in costs at local levels is primarily attributable to transportation costs. Labor costs can vary considerably from one area to another. They can certainly make a difference in the total cost of construction. In some areas carpenters may be scarce and expensive. In other areas there may be a surplus of masons. However, many of the trades move around and follow the work. Unionized workers may demand and get higher wages.

Answer 11

These next three categories (rental rates, rental vacancies, and expense levels) apply primarily to commercial properties, because these types of properties are often valued based on their income and expenses. These next three categories (rental rates, rental vacancies, and expense levels) apply primarily to commercial properties, because these types of properties are often valued based on their income and expenses. When appraising any type of income producing property, the value is primarily a function of the amount of net income a property is able to produce. This is the total income minus expenses. Therefore, the rental rates in an area will impact property values. This applies in both residential apartments and in the rental of commercial or industrial space. In residential appraising usually we consider the amount of rent per apartment. In some cases, for purposes of comparison, we break it down into rent per square foot of living area, per month. Retail space is usually compared on the basis of dollars per square foot per year. Class A office space in an area may rent for $15 to $20 per square foot per year. A property that is more valuable should be able to attract more rent. A property that can produce more rent should be worth more. Rent and value go hand in glove.

Answer 12

In analyzing a rental market, one of the first measures we look at is the percent of rental vacancies. This is analogous to the unemployment rate, in that lower is better. It is possible for a rental property to be occupied 100% of the time, or 365 days a year for all units. You may find properties like that in a really hot rental market. When you encounter a property like this in a "typical" or "average" market, it generally means that the current rental rates are too low. A relatively normal and healthy rental vacancy rate might be in the range of 4% to 5%, for a year. The statistics in your local marketplace are harder to track than the unemployment rate. The government is able to keep pretty close track on the unemployment rate because unemployed people apply for benefits. The rental vacancy rates in an area are sometimes published in your local newspaper. Those kinds of statistics usually emanate from real estate brokers, appraisers, or management companies. You can also do your own checking by calling around to those people as well as other market participants, such as investors or building superintendents

Answer 13

Previously, we said that net income is a function of income minus expenses. Some of those expenses include: Utilities Taxes Insurance Maintenance Supplies Employees The costs of all these items can vary from region to region and locale to locale. You want to do some research to find out if the costs of energy, for example, are above or below the norm. We already said the cost of taxes and insurance will vary according to local influences. There are national studies available online to which you may subscribe, or publications you may purchase, which track these expenses on a national basis.

Answer 14

The third major category of influences on property values is social. This is the shortest list, but that does not mean these influences are not important. These may include: Population trends Population migrations Ages Family formations Lifestyle changes

Answer 15

The prime source for population demographics is the U.S. Bureau of the Census. The formal census is only taken every 10 years, but the Bureau does an annual update for the in-between years. This information is usually available on a regional or local basis, as well, through various planning agencies and chambers of commerce The study of population trends comes right down to the supply and demand again. If people are moving into an area, it will create a demand for housing and services. If people are leaving an area, they will leave behind an oversupply of houses and a diminished need for services. You might just as well go to the horse’s mouth. Most of the local information is derived from studies of the Census Bureau. Click here to go to the Census Bureau website. One of the most interesting categories on the homepage is headed “People & Households” (which is located at the very bottom center of page). I would recommend clicking on the links to “Population Estimates” and “Population Projections.” You could easily spend a week or two wandering through all that data. You also might want to notice the population clock in the upper right corner that keeps a running total of the population for the U.S. and the rest of the world. To the right of that is a box labeled "Quick Facts." Put in your state, city or municipality to get some quick figures.

Answer 16

The population charts will give you the hard facts about immigration and emigration for various locales. That enables us to make some mathematical projections. However, what is more important is knowing your market area and analyzing why people are coming or leaving in such proportions. Which are the fastest-growing areas and why? Where are people going? We have heard for years how people are fleeing the Northeast and the "Rust Belt" states of the upper Midwest. For many years, people retired to the South, particularly Florida. The West and the Southwest had been desired destinations for new jobs or retirement. In recent years, we have heard of many people leaving California and moving to Colorado, Utah and Nevada where there is less pollution and housing is cheaper. Is that true? Do figures back that up?

Answer 17

The age of an area’s residents can have an impact on the market. It also can impact the type of housing and housing values. If an area tends to attract young families with children, then you may see a preponderance of larger houses with more bedrooms. The school systems will tend to have more population and perhaps need to expand. This may result in higher tax rates. Younger families tend to have lower income levels and, therefore, create a need for less expensive housing. Not all of these people will be able to buy, which may result in more demand for apartments. Many young people are staying unmarried for longer periods and this may create a demand for smaller housing units or condominiums with low maintenance costs. If the majority of the residents are middle-aged, they may be near their peak earning years. Many may be empty nesters. This will create a demand for more expensive and amenity-oriented properties. Some areas are destinations for retirees and these people have their own needs and desires in housing. There may be a greater demand for one-level living and community associations where maintenance is provided and where there are recreational opportunities.

Answer 18

You no doubt are aware of the influence of the Baby Boomers. That generation has been described as a bulge moving through the system, as a result of a large number of babies born after the veterans returned from the Second World War. They have had a large influence on the economy and many are now reaching retirement age. How will this affect real estate values and the types of houses that are being built? In 2001, the first wave of baby boomers turned 55, which was significant because according to the Fair Housing Law, at age 55, a buyer is eligible to live in a legally "age-restricted" community. The home building industry is feeling the impact of this demographic surge and seeing a growing demand for active adult housing which meets the needs, demands, and lifestyle of this unique generation.

Answer 19

The nation first became aware of the baby boomers as a group with an impact in the late 1960s, and they have been making their impression on the American culture, economy, and lifestyle ever since. They are wealthy, controlling about 70% of the nation's wealth and 50% of all discretionary income. In 2011, the oldest members of the Baby Boom generation began to turn 65 years of age. Beginning on January 1, 2011, approximately 10,000 baby boomers will reach age 65 every day for the next 19 years. In 2010, only 13% of Americans were age 65 or older. By 2030, 18% of the nation will be at least 65 years of age.

Answer 20

Average family size in America has been decreasing steadily over the years. In the 1900s and 1930s people had large families. In the 1950s and 1960s the average family size was lower. The birth rate has been declining ever since. Around the year 2000, the average U.S. family size dropped below 3.0 persons for the first time ever. For the last several years, the average U.S. family size has held steady at 2.53 to 2.54. Family households (defined as married couples or a man or woman living with other relatives) declined from 81% of all households in 1970 to 68% in 2010. Married couple households with their own children declined from 40% of all households in 1970 to 23.5% in 2010.

Answer 21

In 2010, 25.8% of households were occupied by one person (56% of whom are women) In 2010, 28.1% of households were occupied by married couples with no children In 2010, 5.2% of households were occupied by unmarried partners Add those up and you get the staggering statistic that almost 60% of current households are occupied by one or two people! One would think this would have resulted in changes in new construction between 2010 and the present. The median sized new house built in 2010 had 2,169 square feet, which is over 100 square feet larger than the median new house in 2000, and over 250 square feet larger than the median new house in 1990. However, according to the U.S. Census Bureau, the median size of new homes increased annually starting in 2010, peaking at 2,467 square feet in 2015. The median size decreased slightly in 2016 to 2,422 square feet, and for the partial year 2017, it declined even further to 2,388 square feet. It remains to be seen whether this decline is a trend, or just a temporary "correction." Worth noting is that the 13.7% increase in the average new house size between 2010 and 2015 happened against the backdrop of a nationwide decline in average household size.

Answer 22

The reasons for smaller households include: Young adults waiting longer to get married (now 26.1 years for women and 28.2 years for men) More adults never marrying More divorces More single mothers More older women outliving their husbands More unmarried men and women living together More same sex partners living together Declining birth rate

Answer 23

Lifestyle changes can also impact the fabric of society and result in changing formations in real estate utility and value. For example, changing thoughts about the desirability of energy conservation and environmental concern have permeated the American psyche. Today we are exposed to the concept of "Green Construction" which is based on using environmentally friendly products and building processes. As a social factor, it feels good. As an economic factor, it should result in reduced energy costs.

Answer 24

Community living embraces the idea of shared responsibilities. Examples include various types of ownership in which there are common areas and facilities for the benefit of all the residents. This might include: Condominiums Cooperatives Planned Unit Developments (PUDs) Retirement villages Gated communities Resort complexes There can be many benefits to this lifestyle including: Shared maintenance Common recreation areas Companionable activities Increased security

Answer 25

It is certainly true that there has been a substantial increase in people working at home. The phrase "telecommuting" has become part of our vocabulary. The National Association of Home Builders did a survey a few years back asking what features buyers of new homes wanted. Fifty-eight percent (58%) of respondents replied that they desired a home office. This trend can have manifold influences. With more people working at home, there will be less traffic on highways. This may result in planners reconsidering traffic counts when redesigning the local infrastructure. It also may result in people willing to live further from the main centers of employment. The more remote areas may come into greater demand. It certainly should impact the architectural design of many new homes. It will become more important to have access to the internet. Better room lighting, increased capacity electrical services, and additional electric outlets will be in demand. If people work at home all day long, they will be using more electricity, water, heating and cooling. We are also seeing the emergence of more couples working at home with the need for dual offices. It may be necessary to inquire about subdivision restrictions or CC&Rs that prohibit commercial activities in private residences. Also, some of these developments restrict the number of cars permitted to park on the premises. Another quick check of your understanding is next.

Answer 26

Labor, materials, land

Answer 27

Lessened availability of mortgage loans

Answer 28

Environmental influences are the fourth and final category of external market forces that may impact values. This includes a potentially long list of factors that might, on occasion, influence values. These influences are sometimes called physical or locational influences. They deal with physical things that may decrease or increase values due to their location near the immovable subject property. I'd like to separate these factors into two lists. The first is a list of things that could generally be categorized as “nearness to” factors. In other words “how far is it to the nearest……..” or how convenient is this location in comparison to other comparable and competing locations. Proximity is relative. For example, maybe the subject property is five miles to the nearest convenience store, which might sound like a long way away to some; however in a rural area like the subject's location it may be typical to be 15 to 20 miles from the nearest convenience store.

Answer 29

This first list would include things such as how convenient is the subject location in regard to: Shopping Schools Employment Houses of worship Cultural facilities Recreational facilities Educational facilities Restaurants Police protection Fire protection

Answer 30

This second list consists of physical or environmental features that shape the nature of the area. They tend to have a more general impact and affect most properties equally. This list would include: Climate Topography Soil conditions Nature of improvements in the area Density Natural hazards Man-made hazards

Answer 31

The general climate can have an impact on activities or developments in various areas. The climate in Miami Beach is conducive to year-round, water-related activities. It has become a haven for vacationers and retirees. The same goes for Honolulu. The climate in Minnesota and Wisconsin results in summer activities around the lakes and snowmobiling and ice fishing in the winter. The moderate climates and long growing seasons have encouraged agricultural activities in such areas as central California and parts of the South. The climate and elevation of places such as Aspen and Sun Valley naturally led to the development of ski areas and winter activity centers.

Answer 32

The general topography of an area may dictate development patterns or even preclude development in areas of severe slopes. If the topography of an area is generally open and level or moderately sloping, it opens up the possibilities for various kinds of development; either residential, commercial, industrial, agricultural, or recreational. Hillside areas may prove desirable, gaining privacy and views. On the other hand, sloping land presents more construction problems and additional costs for leveling, terracing etc. It may be prohibitive to develop such land for commercial purposes. It really is a matter of degree, pun intended. A little bit of slope may be nice but if it is too steep, it may limit land use to little more than growing trees or as a nature preserve.

Answer 33

The basic underlying soil conditions are also a consideration and may dictate development patterns as well. If the land is very rocky, it will be hard to build on and require blasting or hammering to excavate for footings or foundations. Drainage may be poor, and the site may require above-ground "mound" type septic systems. Sandy soil will generally drain well but does not have the structural strength of normal soil. Additional footings or structural support may be required. The soil may be a slow-draining type, such as clay, which again will require additional development costs and drainage systems. Soil may be wet with a high water table. It may be swampy, or marshy. This may also preclude any type of extensive development without great expense for draining or dredging the land. This may not even be possible if there are protected wetlands. Even the presence of a swampy area nearby may be a hindrance due to insect problems. If the soil is fertile, with adequate drainage, it may result in most of the land being utilized for agricultural purposes. In that case, the land may have greater value for farming than for development. The basic underlying soil conditions are also a consideration and may dictate development patterns as well. If the land is very rocky, it will be hard to build on and require blasting or hammering to excavate for footings or foundations. Drainage may be poor, and the site may require above-ground "mound" type septic systems. Sandy soil will generally drain well but does not have the structural strength of normal soil. Additional footings or structural support may be required. The soil may be a slow-draining type, such as clay, which again will require additional development costs and drainage systems. Soil may be wet with a high water table. It may be swampy, or marshy. This may also preclude any type of extensive development without great expense for draining or dredging the land. This may not even be possible if there are protected wetlands. Even the presence of a swampy area nearby may be a hindrance due to insect problems. If the soil is fertile, with adequate drainage, it may result in most of the land being utilized for agricultural purposes. In that case, the land may have greater value for farming than for development.

Answer 34

This is a broad category, but we need to look at the big picture and analyze the nature of existing development in the area. Is the area developed to any extent, or is it primarily vacant land? Is the vacant land being utilized for any purpose such as farming, ranching, forestry, etc.? Has the area been developed primarily with residential structures? Are they old or new? Are they well-maintained? How expensive are they? Are they consistent in style and size or is there no pattern? Is there new construction going on now? Is the new construction consistent with existing construction? Is the area urban, suburban, or rural? Are there commercial and retail properties nearby? Are there industrial properties nearby?

Answer 35

Density means how intensively has the area been developed? How many structures are there per acre? Or how many people are there per square mile? What is the average lot size in the area? In many cases this is a function of zoning. Zoning may permit a minimum lot size of two acres per dwelling unit. In another area, the zoning may permit four units per acre. However, we said zoning is a fairly recent phenomenon. The area may have been built up for a hundred years and everyone is on one-quarter acre of land. In urban areas with high-rise buildings, the density may be hundreds or thousands of people to an acre. Density is just one more measure when we are trying to characterize the nature of a market area. Is it an urban area with high density? Or is it an urban area that has a relatively low density of development, as compared to other cities? Is it a suburban area with a medium density of development? Is it more or less densely developed than comparable suburban areas? Are there open spaces? Perhaps the area has been developed with cluster housing, where the buildings are clustered more closely together but then there are mandatory open spaces left for the common enjoyment of the residents. Obviously, if it is a rural area, we would expect to find a low density of development. There may be houses or farms where the typical lot sizes range from 50 acres to a hundred acres or more.

Answer 36

Natural hazards can run the gamut from minor inconveniences to major perils. Some parts of the country are prone to natural hazards. In some cases it is purely random, but other areas have a fairly consistent pattern of recurring dangers. These can include: Hurricanes Tornados Floods Forest fires Earthquakes Volcanic eruptions You might not want to live in an area called "Tornado Alley." The effects of Hurricanes Katrina, Hugo, Irma and Tropical Storm Sandy may be felt for decades. Some areas are particularly prone to certain types of natural disasters, and it may scare some people away.

Answer 37

Man-made hazards can be just as serious, if not more so. In spite of the impressive safety records of nuclear power plants, some people may be reluctant to live near such a plant. The presence of man-made hazards may impact a wide area. Some examples might be: Landfills Chemical plants Superfund sites Toxic waste storage facilities Refineries Some of these situations may result in pollution of the air, water, or ground. Even bad odors may affect areas miles away. Certain areas are prone to smog development many days of the year, which can lead to breathing problems.

Answer 38

When you are appraising a particular property, you need to consider which particular factors are relevant or important in this instance. Maybe the economic factors are normal except for a slight oversupply which is evidenced by lengthening marketing times. However, there is a serious concern in the neighborhood because the city has just announced they will be building a new transfer station for the municipal landfill about a quarter of a mile away. You have to sit back, put your feet up on the desk and think about the subject property in detail. Ask yourself: what are the two or three most important things affecting it? What are the positive factors? What are the negative factors? Do they balance out? What is the net effect - is the property worth more or less because of where it is situated? It may be helpful to make a mental checklist by thinking about the four categories we detailed. What are the important governmental, economic, social, and environmental influences affecting the value of this property? It may be helpful to even list them on paper.

Answer 39

We began this chapter by delineating the four elements that create value. These are Desire Utility Scarcity Effective purchasing power We discussed in detail the four categories of external market forces that influence real estate values, which are: Governmental Economic Social Environmental We gave examples and illustrations of each of these influences.

Answer 40

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Answer 41

Income levels

Answer 42

Borrowing, saving

Answer 43

Governmental

Answer 44

Be able to generate more rent

Answer 45

External market forces

Answer 46

The net income it can produce

Answer 47

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