Chapter 12 - Influences on Real Estate Values Flashcards
Elements of Value
For any economic good to have value it must possess four elements:
- Utility
- Scarcity
- Desire
- Effective purchasing power
Utility and scarcity are supply factors.
Desire and effective purchasing power are demand factors.
Desire is defined as
“A purchaser’s wish for an item to satisfy human needs (e.g. shelter, clothing, food, companionship) or individual wants beyond essential life-support needs.”
If no one wants to buy a piece of land (no desire), there is no value. It is worthless land.
For an economic good to have value, it must have utility. Utility is defined as
“In economics, the ability of a product to satisfy a human want, need, or desire.”
If nobody can figure out a way to use land parcels, they have no value. No one wants them - at any price.
functional utility is defined as:
“The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms.”
Appraisers recognize functional utility as an element of value. If one property has more functional utility than another, it has more value. We also measure loss of value by the amount of diminished utility or inutility that we observe.
Scarcity is defined as
“The present or anticipated undersupply of an item relative to the demand for it. Conditions of scarcity contribute to value.”
Scarcity usually triggers demand. The more scarce an item is, the more valuable it is likely to be.
The opposite of scarcity is an oversupply.
Effective purchasing power is defined as
“The ability of an individual or group to participate in a market, i.e., to acquire goods and services with cash or its equivalent.”
Effective Purchasing Power is also sometimes referred to as “Effective Demand.”
Cup of Air
Does the air in the cup have value?
Desire. Is there desire?
Utility. Does it have utility?
Effective purchasing power. (for free)
Scarcity. Does it have scarcity?
Desire. Is there desire? Sure! Everybody wants and needs air.
Utility. Does it have utility? You bet. I can easily breathe it in and utilize all that oxygen in my blood stream.
Effective purchasing power. Is there effective purchasing power? Not a problem! Just hold your hands out and I’ll dump that air right into your palms. It’s free!
Scarcity. Does it have scarcity? Ah, here’s the problem! Air is in plentiful supply. I can empty that cup out and it will automatically fill right up again with free air.
Therefore, we can conclude that the air in the cup has no monetary value. It lacks scarcity. To have value, a thing must possess all four characteristics.
Value is created and sustained by
external market forces
Value is not created by appraisers. Value is not created by a buyer or a seller. Our task, as appraisers, is to research and analyze the property and the market, and develop and report an opinion of this value.
There are four main categories of external market forces that affect real property:
- Governmental
- Economic
- Social
- Environmental
They overlap in some markets and it is hard to separate and accurately measure the impact of each one.
Examples of governmental forces that might affect real property value
- Planning
- Zoning
- Building Codes
- Environmental restrictions
- Taxes
- Utilities
- Transportation
- Education
- Cultural
- Parks and recreation
- Police
- Fire protection
- Public safety
It has generally been proven that planned communities sustain higher/lower real estate values.
higher
It takes away some of the uncertainty for residents and gives them peace of mind knowing what can (and cannot) be developed nearby.
The first citywide zoning regulations were created in New York City in ____ (year)
1916
The purpose of these regulations was to separate the residential areas from commercial areas.
True or False? All major cities in the U.S. have zoning ordinances.
False
A grossly over-improved house in a neighborhood is very large and good quality, however no one in the neighborhood can afford to purchase it. This demonstrates a lack of
- utility
- desire
- effective purchasing power
- scarcity
effective purchasing power
Taxes would be a(n) _____________ force affecting property values.
- social
- governmental
- physical
- environmental
governmental
Which would NOT be a governmental force impacting value?
- topography
- education
- building codes
- transportation
topography
True or False? In addition to federal environmental authorities, each state has its own agency that controls environmental issues.
True
True or False? Building codes have no impact on property values.
False
Value is influenced by
- buyers only
- sellers only
- buyers and sellers
- external market forces
external market forces
Examples of Economic forces that influence real estate values:
Economic forces tend to be the most powerful and exert the most influence on value of any of the four categories.
- National economy
- Consumer Price Index
- Interest rates
- Availability of financing
- Wage rates
- Types of employment
- Unemployment rates
- Cost of construction
- Rental rates
- Rental vacancies
- Expense levels
Examples of social influences on property value
- Population trends
- Population migrations
- Ages
- Family formations
- Lifestyle changes
True or False? The state of the national economy has no effect on local real estate values
False
Generally speaking, low interest rates encourage ___________, while high interest rates encourage ___________.
- saving, spending
- saving, borrowing
- buying, selling
- borrowing, saving
borrowing, saving
________ industries consist of the major employers in an area. They are net exporters, meaning they produce goods that are shipped outside the region and bring more money back into the region.
Basic
After the crash of the mortgage lending industry in the late 2000s, lenders that remained in business
- tightened their underwriting standards
- began offering 100% loans with no PMI
- loosened their underwriting standards
- began offering more “stated income” loans
tightened their underwriting standards
Population trends, ages, and family formations are all examples of _________forces that affect values.
social
The mortgage meltdown of the late 2000s resulted in
- an increased availability of mortgage loans with easy terms
- many new lenders jumping into the industry
- lessened availability of mortgage loans
- loose and easy underwriting standards
lessened availability of mortgage loans
True or False? Over the last several years in the U.S., there has been a substantial decrease in the number of people working from home.
False
An optimal U.S. unemployment rate would be
- 0%
- 6%
- 3% to 4%
- 7% to 9%
3% to 4%
In analyzing a market area, an appraiser finds that most of the residents are middle-aged, and some are empty-nesters. This would typically mean
- there is a demand for rental homes and apartments
- there is a demand for more expensive homes
- there is a demand for larger homes with more bedrooms
- there is a demand for more schools
there is a demand for more expensive homes
