“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Chapter 5 Residential Market Analysis

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Major Topics  Demand drivers for home ownership  Drivers of long and short term owner occupied housing market  The decision to buy or rent  The cost of home ownership  Calculating what you can afford  How the government supports mortgage lending and discourages discrimination  Age and ownership  Simple models of multifamily housing analysis  The dynamics of rental housing market  Trends in residential housing

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Introduction  Residential structures account for 24% of value of all assets owned in U.S.  Each generation desires bigger and better homes  Average new housing is 25% bigger than what it was fifty years ago  Home ownership rate has been rising steadily  64% in 1990 to 68% in 2002

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Is Home Ownership a Right?  Home ownership is thought to provide not only shelter and comfort but also some degree of financial security, and in some cases significant investment returns as well  In a capitalistic system, no one has a “right to home ownership”, but safe and healthy housing for all citizens is considered a national priority – much like full employment

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Long Term Demand for Housing  Demand for housing is a function of:  Household growth rate  General economic productivity  Indicators of housing demand:  Population  Household sizes

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Long Term Demand for Housing (Contd.)  What influences Household Size?  People are living longer – more of life spent without children at home  Women outlive men – more widowed single households  People are having fewer children  More women participating in the workforce  Divorce rate in the U.S. has been steadily rising

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Regional Demand for Housing Factors leading to absolute and relative growth in the number of households:  Size of existing population  Job Growth (especially within export sector)  Overall Quality of Life

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Short Term Demand for Housing  Dominant factors for short term demand:  Mortgage interest rates  Seasonality (climate, schools, holidays)

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner The Buying vs. Renting Decision Economic Factors  Capital constraints  Expected tenure  Income tax rate  Tax laws for capital gains  Mortgage rates & Financing programs  Investment aspects (expected appreciation)  Budgeting risk

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner The Buying vs. Renting Decision (Contd.) Psychological Factors  Control over housing unit (design, appearance)  Long term housing aspirations  Ego satisfaction and utility of ownership

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner How Much Home can one Afford?  Sources of capital : Equity or Debt  The before tax costs of owning a home include:  Mortgage payments (most significant)  Property taxes  Property insurance  Utilities  Maintenance

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Federal Government Assistance  VA  FHA  GNMA  FHLMC

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Housing Products and Demand Segments Product Segmentation  Single family detached  Single family attached (usually condominium)  Manufactured housing  Mobile homes

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Analysis of Housing Market: Demand  Simple Population and Household Trending  Estimating demand based on employment growth

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Analysis of Housing Market: Supply Developer Monitoring  Estimating the supply coming online is very difficult due to large number of developers of varying sizes  It is very easy to supply too much housing and the housing market tends to move in cycles

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner  Apart from aggregate market analysis, developers use a simple model:  “Keep building units as long as they sell or rent”  Short term indicators are:  Occupancy rates (conversely vacancy rates)  Waiting lists  Recent rental growth rates The Integrated Development Model: Short Term Modeling of Demand & Supply

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Housing Market Dynamics: Searching for Equilibriums  Supply and Demand are bought together by “price”  Economic principles to understand housing markets

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Patterns of Possible Rental Housing Market Changes  Two general processes which bring a market back to long run equilibrium after a change in demand or supply: 1. Demand increases or supply is reduced 2. Demand is reduced or supply increases beyond equilibrium levels

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Demand Increase or Supply Reduction D1 D2S1 S2 1 st 2 nd Q1Q2 Rent Supply

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner D1 S1 S2 1 st 2 nd Q1 And Q3 Q2 Rent Supply 1 st Supply Over-shoots Demand 2 nd

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Senior Housing Options Seniors’ location preference:  Warmer Climate  Low income tax  Close to prior housing location Senior Housing Options:  Active Adult Community Independent Living Housing  Congregate Housing with Assistance  Congregate Housing with Assistance and Nursing  Skilled Nursing Homes  Alzheimer’s Specialized Care Centers  Hospice Centers

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Trends in Housing Market  New economy has increased the population of mobile workers  Mobile worker travels frequently and more wealth and higher income  More and more households own second homes today  If this trends continue people will have three or four homes strategically located for business or pleasure  Internet has put pressure on brokerage costs and this may result in increased buy and sell transactions  Senior population has increased much faster and housing suiting their needs will have good demand  A permanent renter market is also becoming more common  Apartments are getting bigger and better

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner END