©2011 Cengage Learning

Chapter 5 ©2011 Cengage Learning IMPORTANT ECONOMIC FEATURES OF REAL ESTATE

Market: a place where buyers and sellers meet to exchange items of value. There are numerous buyers and sellers Buyers and sellers are knowledgeable and free to move in or out of the market. No party has control over the market Buyers seek the lowest prices ©2011 Cengage Learning In a perfect competitive market: Economic Characteristics of Real Estate Markets

In Real Estate Markets: supply is fixed in the short run. cannot respond quickly to changes in the market conditions. nonetheless, supply and demand are still an important factors. ©2011 Cengage Learning

Characteristics The total amount of land is fixed The intensity of land use can be increased The process of increasing density requires a substantial amount of time and money. In the short run market prices and rents will be determined by local changes in demand. ©2011 Cengage Learning

Perfect Markets Many Participants All products are alike and interchangeable Item purchased are small, relatively inexpensive, & purchased frequently. Government plays little if any role; Laissez-Faire prevails. Prices are established by the smooth interaction of supply and demand. ©2011 Cengage Learning

Typical Real Estate Markets Few participants Buyers and sellers are not knowledgeable Each parcel of Real Estate is unique & no two are alike The location is fixed Real Estate is purchased infrequently (rarely more than four or five times). Government plays a dominant role in Real Estate development through fiscal and monetary tools and zoning, environmental, and health codes. Prices are influenced by supply and demand; a lack of knowledge by either the buyer or seller can distort the price paid. ©2011 Cengage Learning

An increase in demand for real estate will: Reduce existing vacancies of most housing types. Rents and prices will increase. More product will be built because of increased profits. Supply of new product will grow slowly. Vacancies will begin to rise as increased supply catches up to demand. Increased vacancies cause a fall in rents and prices. As the market adjusts to lower rents and prices, profits will decrease squeezed between rising costs and falling sale prices. As profits fall, production will decline. ©2011 Cengage Learning How the Real Estate Market Reacts to Changes in Demand

Decreased demand for Real Estate will: Increase vacancies Will cause rents and prices to decline Move people into more spacious accommodations Cause market segments that cannot compete to abandon or demolish improvements. Remain in this state until demand once again increases. ©2011 Cengage Learning

Changes in demand are caused by: Population Income Availability of mortgage credit Personal lifestyles Governmental actions ©2011 Cengage Learning

The advantages of Foreign Ownership of U.S. Real Estate: Generates income & is distributed into the economy Provides tax revenue Generates income for Real Estate professionals ©2011 Cengage Learning

The disadvantages of foreign ownership: United States becomes less self-sufficient Gives the government less incentive to solve budget problems. High prices due to increased demand keep local investors out of the real estate market. ©2011 Cengage Learning

Real Estate Professionals can provide the following services: Provide current market information Advise clients and customers Provide advise on financing Help close real estate transactions Encourages selling & buying, making a more active market. ©2011 Cengage Learning The Role of the Real Estate Professional

©2011 Cengage Learning Q (Quantity) P(Price) Equilibrium Price (Point) Demand Curve Supply Curve Demand and Supply in Equilibrium

Demand changes are caused by: Population Income Personal tastes Credit Substitute projects Advertising ©2011 Cengage Learning

Supply changes are caused by: Cost of production New technology New construction Demolition ©2011 Cengage Learning

Graphs of the demand and supply curves show how the quantity varies with price. These graphs are a useful tool, to help understand the impact of economic change on prices.

©2011 Cengage Learning Demand Curve

©2011 Cengage Learning Movement Along the Demand Curve

©2011 Cengage Learning Supply Curve

©2011 Cengage Learning Movement Along the Supply Curve

©2011 Cengage Learning Demand and Supply in Equilibrium

©2011 Cengage Learning Shift in Demand

©2011 Cengage Learning Shift in Supply

©2011 Cengage Learning Shift in Demand

©2011 Cengage Learning Shift in Supply

©2011 Cengage Learning Increase in Demand, Supply Curve Remaining the Same

©2011 Cengage Learning Decrease in Demand, Supply Curve Remaining the Same

©2011 Cengage Learning Increase in Supply, Demand Curve Remaining the Same

©2011 Cengage Learning Decrease in Supply, Demand Curve Remaining the Same

©2011 Cengage Learning Real Estate Demand Curve with a Short-Run Fixed Supply

©2011 Cengage Learning Increase in the Demand for Real Estate with a Short-Run Fixed Supply

©2011 Cengage Learning Decrease in the Demand for Real Estate with a Short-Run Fixed Supply