©2011 cengage learning. chapter 5 ©2011 cengage learning important economic features of real...
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©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 sellersBuyers and sellers are knowledgeable and
free to move in or out of the market.No party has control over the marketBuyers seek the lowest prices
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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.
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CharacteristicsThe total amount of land is fixedThe 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.
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Perfect MarketsMany ParticipantsAll products are alike and interchangeableItem 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.
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Typical Real Estate MarketsFew participantsBuyers and sellers are not knowledgeableEach parcel of Real Estate is unique & no two are
alikeThe location is fixedReal 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.
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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.
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How the Real Estate Market Reacts to Changes in Demand
Decreased demand for Real Estate will:Increase vacanciesWill cause rents and prices to declineMove 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.
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Changes in demand are caused by:PopulationIncomeAvailability of mortgage creditPersonal lifestylesGovernmental actions
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The advantages of Foreign Ownership of U.S. Real Estate:Generates income & is distributed into the
economyProvides tax revenueGenerates income for Real Estate
professionals
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The disadvantages of foreign ownership:United States becomes less self-sufficientGives the government less incentive to
solve budget problems.High prices due to increased demand
keep local investors out of the real estate market.
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Real Estate Professionals can provide the following services:
Provide current market informationAdvise clients and customersProvide advise on financingHelp close real estate transactionsEncourages selling & buying, making a more
active market.
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The Role of the Real Estate Professional
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Q (Quantity)
P(Price) Equilibrium Price(Point)
Demand Curve
Supply Curve
Demand and Supply in Equilibrium
Demand changes are caused by:PopulationIncomePersonal tastesCreditSubstitute projectsAdvertising
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Supply changes are caused by:Cost of productionNew technologyNew constructionDemolition
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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.
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Demand Curve
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Movement Along the Demand Curve
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Supply Curve
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Movement Along the Supply Curve
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Demand and Supply in Equilibrium
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Shift in Demand
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Shift in Supply
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Shift in Demand
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Shift in Supply
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Increase in Demand, Supply Curve Remaining the Same
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Decrease in Demand, Supply Curve Remaining the Same
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Increase in Supply, Demand Curve Remaining the Same
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Decrease in Supply, Demand Curve Remaining the Same
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Real Estate Demand Curve with a Short-Run Fixed Supply
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Increase in the Demand for Real Estate with a Short-Run Fixed Supply
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Decrease in the Demand for Real Estate with a Short-Run Fixed Supply
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