Flashcards in Economic Characteristics Deck (5)
Value of the Land
The economic characteristics define and pertain to value and change in value of the land. The economic characteristics of real property are:
Scarcity or limited availability;
Permanence of investment; and
Improvement by modification.
The economic characteristics define and pertain to value and change in value of the land.
The interplay of all these characteristics produces an exciting and challenging commodity to market, requiring a marketing strategy that takes into account both physical and economic characteristics of the marketplace as well as the land. These include, but are not limited to, interest rates, demographics, employment levels, vacancy rates and absorption levels.
An important economic characteristic of real property is its scarcity, its availability or lack of availability. It follows the principle of supply and demand, which states that the greater the supply of any commodity in comparison to demand, the lower the value will be. In appraisal terminology, a lack of supply of some type of real property, the supply of which cannot readily be increased, creates scarcity. Scarcity results in increased value when demand exceeds supply.
Land is a commodity that is in fixed supply; no additional supply of land is being produced to keep pace with the ever-increasing population and not all land is suitable for human use.
Supply of Land
The problems created by an ever-increasing demand for the limited supply of desirable land have been eased substantially by the increase in economic supply of land. While the absolute land supply is fixed, the economic supply of land is increased when previously less suitable land is made more suitable by applying technologies or strategies for more intensive use, and/or by increased access.
An increase in economic supply comes from the increased utilization of land. On agricultural land, fewer and fewer acres are needed to produce the world's supply of food. As a result of advances in technology, people are able to create high-rise office buildings, apartments and multilevel shopping centers. Consequently, one acre of land now may serve many more people than could have utilized that land in the past.
Permanence of Investment
The income return on real estate investments is usually long-term, relatively stable, and usually extends over what is referred to as the economic life of the improvement. The economic life is the estimated period over which an improved property may be profitably utilized so that it will yield a return over and above the economic rent attributable to the land itself; the period during which an improvement has value in excess of its salvage value. In the case of an older structure or improvement, economic life refers to the remaining period during which the improvements to the real property (not land) are depreciated for tax purposes. The economic lives of such improvements are normally shorter than their actual physical lives.
When the term economic life is applied to a structure, it refers to the years or age indicated by the condition and utility of the structure, as opposed to its actual or chronological age.