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RES 220 Presentation Slides Real Estate Economics – October 5, 2009 • Introduction by Individual Attendees and the Backgrounds & Goals of Class Members • Discussion of Goals Specific to Individual Learning Objectives • Weekly Class - Sample Schedule • Review of Text Outline - Chapters 1 & 2 • Introduction to Len Johnson’s Background • Break 7:30 – 7:45 • Review of Chapters 3 & 4 Class Introductions Introduction by Individual Attendees and the Backgrounds & Goals of Class Members Additional Class Goals Discussion of Supplemental Learning Objectives Real Estate Economics Weekly Class Schedule • Review & Discussion of Economics Derived from Real Estate Periodicals (15 -30 minutes) Local Impacts due to changes in International, National Economics & Business and the impacts on Local Real Estate Economic Issues; • Review of Topics from Assigned Reading • Guest Speakers • Other Real Estate Topics from Individual/Class Objectives such as Real Estate Valuation and Acquisition strategies (such as Chapter 16) Guest Speakers October 12– Economic Features Real Estate - Allen Safer, MAI – Managing Director Integra Realty Resources October 19 – Economic Trends Northwest - Review of Michael Parks – Marples Pacific Newsletter Presentation October 26 – Housing and Federal Financing - Guest Speaker, Federal Home Loan Bank November 9– “Land Use, Economic Issues & Public Policy” - – Guest Speaker- Economic Development City of Renton / Boeing 300 Acre Redevelopment Plan December 13th - Current Status “Career Opportunities” - Jeff Harris, Harris & Associates & Pacific Capital Advisors Real Estate Economics Review of Textbook & Reading Material Supplemental Reading Material - Edge City by Joel Garreau - Schizomania by Jack Lessinger Real Estate Economics Overview Part One - Basic Economic Background for Real Estate Analysis Part Two - Understanding Real Estate Markets Part Three - Major Influences on Real Estate Development Part Four - Real Estate Investment The Economics of the Parcel Part One - Basic Economic Background for Real Estate Analysis • Introduction to Real Estate Economics • Review of the Economic Principles of Capitalism – Basic Economic Concepts – Economic Principles in Action – Markets and Prices Part One - Basic Economic Background for Real Estate Analysis • Government’s Role in the Economy – The Real World of Markets and Government – Measuring the Performance of the Economy – Changes in Economic Activity – Government Tools to Fight Economic Problems • Money, Credit, and Real Estate – The Supply of Money – The Federal Reserve System – The Actions of the Federal Reserve & Impacts on Real Estate Part One - Basic Economic Background for Real Estate Analysis • Important Economic Features of Real Estate – Economic Characteristics of Real Estate Markets – How the Real Estate Market Reacts to Changes in Demand Part Two - Understanding Real Estate Markets • Six Chapters - Regional, Community and Neighborhood Analysis; • Objective: Evaluate why local and regional economics change and how these changes are reflected in the real estate market; Part Three - Major Influences on Real Estate Development • Chapter on each of Four Topics, Generally considered Controversial Issues in Real Estate: – Real Estate Taxation – Land-use controls – Real Estate Development Procedures – Required Government Reports Part Four - Real Estate Investment The Economics of the Parcel • Utilizes previous text and study to: – Demonstrate how the principles of Real Estate Economics can be utilized to analyze specific properties – Topics include: • Investment principles • Cash flow analysis • Income tax aspects • Forecasting trends Review of Chapters 1 & 2 Review Real Estate Economics* “How Industry Professionals Evaluate & Consider Real Estate Economic Indices ” *National Association of Industrial Office Parks “NAIOP” 4th Quarter – 2003 Meeting and Presentation Chapter One Introduction of Real Estate Economics • Economics is the science that is concerned with how individuals and societies choose to use resources to produce, distribute, and consume goods and services. • Real estate is defined as land, to which is affixed to the land, that which is appurtenant to the land, and which is immovable by law. Chapter One Introduction of Real Estate Economics • Real estate economics is the study that uses economic principles, both macro and micro, to analyze the impact that national, regional, community and neighborhood trends have on real estate values. • Real estate economics is the link between general economic theory and applied real estate practice. (Neither the study of general economics nor a course in the practice of real estate) General Overview General GeneralEconomics Economics Principles & Theory Principles and Theory Real Estate Economics Real Estate Principles & Theory The field of Real Estate Economics draws principles from both general economics and real estate practice. Chapter One Introduction of Real Estate Economics • Why study Real Estate Economics? Chapter One Introduction of Real Estate Economics • Reasons we study Real Estate Economics: – Reasons for change in land use and values; – How to anticipate change – How change is measured - valuation – Supports the understanding of the impact of real estate decisions and related actions will have on real estate values. General Overview of Course & Text • Part One - “Basic Economic Background for Real Estate Analysis” “Stairway of Real Estate Economics” a.k.a. Stairway to “Real Estate Heaven” Final Real Estate Decision Investment Analysis Government’s Role in the Economy Taxes, Land Usage and Environmental Real Estate Market Analysis Regional and Community Analysis Real Estate and the National Economy Government’s Role in the Economy Basic Economic Principles Chapter Two - Review of the Economic Principles of Capitalism Economics Revisited – Economics attempts to determine how scarce goods and services can be distributed efficiently; – Choice and Opportunity Cost • A key concept is the choice between scarce resources and competing uses; • Every choice incurs a cost; – Role of Economist to examine alternate solutions to scarcity problems Chapter Two Review of the Economic Principles of Capitalism • Principles of Capitalism –Private Property - Rights of individual –Private Enterprise - Resources and Business owned by private citizens –Competitive Markets - Numerous buyers and sellers with goods allocated to lowest price –Profit Motive - Provides motivation and most often results in efficiency in markets –Laissez Fiare - Non-interference by government Chapter Two Review of the Economic Principles of Capitalism U.S. - Mixed Capitalism - Intersection of private enterprise and government involvement • Market Economy – Mixed Capitalism versus Pure Capitalism • Command Economy – Pure Socialism versus Mixed Socialism Chapter Two Review of the Economic Principles of Capitalism Reviewing our Understanding Basic Economic Concepts • What is the definition of economics? • What does an economic system attempt to do? • What is government’s role under capitalism? Under Socialism? Chapter Two Review of the Economic Principles of Capitalism 1) 2) 3) 4) Factors of Production Land - Natural Resources Labor - Human Effort Capital - Money and operating equipment Entrepreneurship - Production effort “going into business” Chapter Two Review of the Economic Principles of Capitalism • Capitalism - Private – Rent, Wages, Interest, Profit and Income • Circular Flow of the Economy Circular Flow of the Economy Chart Demand----Resource Market---Supply Factors of Production Business Sells Goods & Services Individuals &Households Product Market Demand---- Goods & Services ---- Services Chapter Two Review of the Economic Principles of Capitalism Reviewing Our Understanding Circular Flow of the Economy 1 - Business experiences a decline in sales and decides to cut back on production. Will the economy rise or decline? Will household income increase or decrease? 2 -What will happen if this flow if the reverse takes place and high profits motivate business to expand its output? (figure 2.2) Chapter Two Review of the Economic Principles of Capitalism Markets and Prices – Definition of a market: “Place where buyers and sellers meet to bargain and exchange items of value at a negotiated prices”; – Markets with Perfect Competition • Equal number of buyers and sellers; – Markets with Imperfect Competition • Imbalance between buyers and sellers; Chapter Two Review of the Economic Principles of Capitalism Markets and Prices – Demand and Supply • Classic Answer to Price Determination • Law of Demand –The lower the price, the more consumers will buy; –The higher the price, the less they will buy. Chapter Two Review of the Economic Principles of Capitalism Markets and Prices Changes or Shifts in Demand • An increase or decrease in population • An increase or decrease in per capita income • Changes in consumer taste and substitute products • The amount of credit available • The effect of advertising Chapter Two Review of the Economic Principles of Capitalism Markets and Prices Supply • The total quantity that sellers are willing to sell at prices increase and fewer as prices decrease – Higher prices may mean higher profits, resulting in increased output; – Decreased prices, profits usually decline, and businesses cut back on output; Chapter Two Review of the Economic Principles of Capitalism Markets and Prices - Changes or Shifts in Supply • Supply, like demand, reflects changing circumstances: 1) Changes in the cost of the factors of production; 2) A change in demand for one product can cause a change in supply of another product; 3) Business anticipation of future prices and profits can change the amount of goods supplied. Chapter Two Review of the Economic Principles of Capitalism Markets and Prices -Supply and Demand • Supply and Demand together determine output and price levels: • Equilibrium Point – Prices settle at the point where the quantity the buyers are willing to purchase equals the quantity that sellers are willing to sell; Chapter Two Review of the Economic Principles of Capitalism Markets and Prices -Supply and Demand International Trade Concepts 1) Free Trade 2) Principle of Competitive Advantage 3) Balance of Payments 4) Balance of Trade 5) Rate of Exchange 6) Importing and Exporting Chapter Two Review of the Economic Principles of Capitalism Reviewing Your Understanding - Markets & Prices • If supply stays the same but demand decreases, what will happen to price? To the amount supplied? • If the demand remains the same but supply increases, what will happen to price? To the amount supplied? • If the main industry in your town goes out of business, what effect will this have on the price of homes? In terms of supply and demand, what has occurred? Chapter Three Government’s Role in the Economy Goals: • Discuss why government’s role in the U.S. Economy has been expanding; • Define Gross Domestic Product and label the phases of the Business Cycle • Describe the trend in national Real Estate Cycles • Define and explain the two main tools used by the Government to fight economic problems Chapter Three Government’s Role in the Economy • Imperfect markets arise when groups of buyers and sellers are able to influence prices and output of goods or services; • U.S. Government has regulated business – 1890’s Antitrust Acts to regulate business – 1897 Interstate Commerce Commission – 1980’s transition to deregulation of Financial and Transportation Industries – 1990’s transition back to more regulation Chapter Three Government’s Role in the Economy Arguments made by those in favor of more Regulation: • Government regulation “assures competition” • Government regulation assures defense capacity • Government needs more resources to allocate to social objectives rather than depend on non-profits • Government should manage the economy to “fight” inflation, recession and unemployment Chapter Three - Government’s Role Measuring the Performance of Economy • Measurement of Economic Performance – Gross Domestic Product “GDP” = The total market value of all goods and services produced domestically in the United States during a period, normally measured in calendar year. Chapter Three - Government’s Role Measuring the Performance of Economy • Measurement of Real GDP – Doesn’t factor-in foreign manufacturing of domestic consumption; – Net of inflation Chapter Three - Government’s Role Measuring the Performance of Economy Income Measurements: • Personal Income: Personal Income net of business taxes, before personal taxes; • Disposable Personal Income: Income after payment of personal taxes; – Generally a good indicator of purchasing power; • Discretionary Income: Amount available after paying necessities; Chapter Three - Government’s Role Measuring the Performance of Economy Changes: in GDP, personal income, disposable personal income and discretionary income important as an indicator for real estate investment. • May enhance consumption capacity; • May encourage refinancing and greater capacity for personal debt and real estate debt financing; Chapter Three - Government’s Role Measuring the Performance of Economy Foreign Ownership of Real Estate: • Expansion and Contraction during the 1990’s due to economies; – Flight of Capital due to Political Stability - 1989 China – Value of the U.S. Dollar relative to other currencies – Potential for higher yields - Budget moving toward Balance with stronger U.S. Dollar Chapter Three - Government’s Role Measuring the Performance of Economy Foreign Ownership of U.S. Businesses & Real Estate Expansion and Contraction Examples 1980’s Japanese - Excess liquidity 1989 - Flight of Capital from Asia/Pacific & Taiwan due to Political Stability - 1989 China 1993 - Japanese start liquidating U.S. Holdings to support financial crisis combined with drop in U.S. Real Estate Values Years 2004 - 2005 • Residential Markets Continued Upward Trend In Supply & Demand • Individual Homeowners Utilized their Homes to Finance Spending; • Low Interest Rates Accelerated Demand; • Car Manufacturers Provided Zero Percent Financing to Increase Sales; • President & Policy Makers Supported Higher Percentage of Homeownership Years 2006 - 2007 • Residential Markets began to Correct • Supply of Residential Housing Exceeded Demand; • Mortgage Backed Securities Continued to be Sold Into the Worldwide Market Chapter Three - Government’s Role Measuring the Performance of Economy Foreign Ownership of U.S. Businesses & Real Estate Expansion and Contraction Examples • Value of the U.S. Dollar relative to other currencies • Potential for “safe-haven” higher yields • Budget Deficits – Mid-decade Warren Buffet began “selling” U.S. Dollar due to various domestic and international reasons Chapter Three - Government’s Role Measuring the Performance of Economy Ownership of U.S. Businesses & Real Estate • Value of the U.S. Dollar relative to other currencies - currently dropping against world currencies; (disincentive for U.S. Real Estate) • U.S. Budget Deficits - Warren Buffet currently moving capital into international market by “selling” U.S. Dollar in favor of investing in U.S. domestic businesses • U.S. Trade Deficit - Growing at rapid pace Chapter Three - Government’s Role Measuring the Performance of Economy Changes in Economic Activity - Business Cycle • Business Cycle: Recurrent expansions and contractions in general business activity, generally over a period of two to six years; • Most recent - Longer-term cycle - Stock market expansion early 1990’s through March - 2000; • Again through 2007 • Correction Since 2007 from Dow 14,000 to 6,500 Dow Jones 1973 to Oct 1-2009 Chapter Three - Government’s Role Measuring the Performance of Economy Changes in Economic Activity - Business Cycle • Real estate cycles generally impacted by business cycle and other governmental actions: • 1974 - High interest rates, slower demand • Late 70’s acceleration of demand • 1980 - High interest rates, slow demand for most real estate segments; • 1986 - Change in tax policy, drop in real estate values • 2000 - Government policy of low interest rates drives liquidity, home refinancing and increase in values. Chapter Three - Government’s Role Measuring the Performance of Economy Business Cycle Graphic • Prosperity, Recession, Depression and Recovery • Alternative theories - Jack Lessinger, PhD Chapter Three - Government’s Role Measuring the Performance of Economy Business Cycle - Causes • War and International Conflicts; • Emergence of new industries; • Varied consumption and savings patterns by consumers; • Changes in amount of money and credit in circulation; • Psychological aspects of consumers and business investors Chapter Three - Government’s Role Measuring the Performance of Economy Business Cycle - Economic Forecasting • Reduces inherent uncertainty; • More “art” than science Chapter Three - Government’s Role Measuring the Performance of Economy Real Estate Cycles - (Later in More Detail) Examples: • Commercial office demand - Complex issues of supply and demand tied to business climate and financing; • Housing - Demand and supply impacted by consumers and relative cost of financing and impact of interest rates on occupancy costs; • Regional diversity associated with local markets Economic health - Seattle versus San Diego Chapter Three - Government’s Role Measuring the Performance of Economy Government Tools to Fight Economic Problems • Fiscal Policy: Government use of taxes and spending to help counteract recession, unemployment and inflation; • Monetary Policy: Government strategies to increase or decrease the money supply in the attempt to stabilize the economy to counteract: recession, unemployment and inflation Chapter Four - Money, Credit & Real Estate Money & Credit: Critical Effect on Real Estate • Money supply: Generally in the form of demand deposits • Monetary Policy: Government strategies to increase or decrease the money supply in the attempt to stabilize the economy to counteract: recession, unemployment and inflation Chapter Four - Money, Credit & Real Estate What is Money? • • • • Money is a medium of exchange; Money is a measure of value; Money is a store of value; and Money is a standard of deferred payment. Chapter Four - Money, Credit & Real Estate Goal for this Chapter • Explain what money is and describe how banks and other depository institutions create money; • Understand the purpose of the Federal Reserve System • Money is a store of value; and • Money is a standard of deferred payment. Chapter Four - Money, Credit & Real Estate Money • Coins, currency and checking accounts; • Demand Deposits --- 73% checking accounts; • Depository Institutions- “Create Money”: - Fractional Reserves (Ratio of reserves to available for loans); - Federal Deposit Insurance - $100,000; • Classifications of Money Supply • M1 versus M2 . Chapter Four - Money, Credit & Real Estate Money • Classifications of Money Supply • M1 versus M2 • M1 = coins, paper money and demand deposits M2= M1 plus liquid accounts (savings, CD’s and money market accounts) M3= M2 + large CDs over $100,000 Chapter Four - Money, Credit & Real Estate Money & Inflation • Expansion of Money Supply • Interest Rates tend to drop • Excess can result in inflation • Constricting money supply can artificially impact liquidity; and • Too much liquidity can result in increased demand and inflation can be a result. Chapter Four - Money, Credit & Real Estate Inflation – Two Types • Demand – Pull Type • Cost – Push Type Chapter Four - Money, Credit & Real Estate Reviewing Our Understanding • How has the Federal Deposit Insurance Corporation (“FDIC”) strengthened our banking system? • If all banks keep 10% of deposits in reserve what is the maximum deposits and loans that can be generated if a new deposit is taken into the system? • If the economy is in recession, and assuming you had a the power would you increase or decrease the percentage of reserves that banks must keep to back each deposit? Why? • How can to much money create inflation? What problems does this cause for real estate brokers? Chapter Four - Money, Credit & Real Estate Federal Reserve System • Regulates the Money Supply and credit; • Established in 1913 with 12 Regional Banks with a seven member board of Governors; • Refer to Figure 4.1 • The “Fed” controls bank reserves by using the following tools: • Changes in reserve requirements • Open Market Operations; • Changes in the Discount Rate; Chapter Four - Money, Credit & Real Estate Federal Reserve System – Controls over Money Supply • Reserve Requirements • Fed has the right to vary the percentages within certain ranges; • Fed can constrict money supply to “slow inflation by reducing the amount of spending” • Open Market Operations • Fed is allowed to buy and sell Government Securities • Purchase - Impact of producing more liquidity in the market • Sells securities – Decreases liquidity and available credit; Chapter Four - Money, Credit & Real Estate Federal Reserve System – Controls over Money Supply • Changes in the Discount Rate • Amount Fed Charges member institutions for credit • By decreasing discount rate , Fed can generate additional liquidity; • By increasing discount rate, Fed can decrease the amount of money available for loans; • What happened during the 1929 Stock Market Crash; • What happened during the collapse of Long Term Capital Corporation in 1998? Chapter Four - Money, Credit & Real Estate Federal Reserve System – Controls over Money Supply • Federal Funds Rate = Overnight deposit rates between banks; • Federal Reserve can increase liquidity by allowing federal funds rate trading range to expand, thus encouraging inter-bank borrowing; • Conversely, Federal Reserve can decrease liquidity by constricting trading range of inter-bank borrowing. Chapter Four - Money, Credit & Real Estate Federal Reserve System – Summary • Increase in Money Supply – • • • • Decrease reserve requirements; Buy Government Securities; Decrease the Discount Rate; Or….Some combination of all the foregoing. Chapter Four - Money, Credit & Real Estate Federal Reserve System – Summary • Decrease in Money Supply – • • • • Increase reserve requirements; Sell Government Securities; Increase the Discount Rate; Or….Some combination of all the foregoing. • Decrease or Increase can also be enhanced by raising or lowering the Federal Fund rate. Chapter Four - Money, Credit & Real Estate Foreign Capital - Challenges • Impact of Budget Deficits and Currency Risk– • Sale of U.S. Government Bonds to foreign investors historical short-term solution to budget deficits; • U.S. Government attempts to influence world financial markets to maintain competitive U.S. Government Bonds; • Domestic liquidity impacted by the international demand for U.S. Bonds (i.e., currency risk and higher U.S. interest rates); • IMF – January, 2004 - Critical of U.S. policies including Budget Deficits.