Chapter 07: Single Family Housing: Pricing, Investment, and Tax Considerations McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

7-2 Homeownership  Homeownership is not just shelter. It can also be an investment vehicle.  Price Influences  Income and Employment  Interest Rates  Renting vs. Owning –Economic –Other Issues

7-3 Tax Considerations  Interest Deduction –Qualified residence –Maximum deduction  Real Estate Taxes  Capital Gains Exclusion –$250,000 and $500,000 –Primary residence rules and occurrence rules

7-4 Regional Dynamics  Speculative Housing Bubbles  Regional Economic Drivers –Growth or Decline?  Regional Comparative Advantage –Natural Advantages –Employee Characteristics –Access to Transportation –Quality of Life

7-5 Housing Supply  Housing Starts  Existing Home Sales  Local Supply Influences –Interest Rates –Zoning –Building Codes –Land Terrain

7-6 Housing Supply  Neighborhood Influences –Public goods –School quality  Capitalization Effect –Public services provided relative to taxes paid  Optimal City Size

7-7 Appraisal: Qualifying the Property  Establish Market Value –Most probable price under competitive market conditions  Price, Cost of Construction, and Market Value  What are market conditions?  What are submarket conditions?  What is the neighborhood?

7-8 Sales Comparison (Market) Approach  “Subject” is the property being appraised  “Comparables” are recently sold similar properties  Estimate value of subject by adjusting the sales price of the comparables for any differences  Subject Value Estimate = Comparable Sales Price ± Feature Differences

7-9 Cost Approach  Subject Value Estimate = Cost New – Depreciation + Land Value  Physical depreciation, functional obsolescence, external obsolescence  Depreciation is often estimated straight- line

7-10 Income Approach  Gross Rent Multiplier (“GRM”)  Subject Value Estimate = GRM x Rental Income

7-11 Appraisal: Qualifying the Property  The sales comparison approach is most effective for active residential markets  The cost approach is most effective for special use property or newer homes  The income approach is most effective for cash flow generating property