Chapter 9 - Real Property Markets Flashcards
“A set of arrangements in which buyers and sellers are brought together through the price mechanism; the aggregate of possible buyers and sellers and the transactions between them.” is definition of ________
Market
An __________ market is defined as:
“A market characterized by numerous transactions.”
active
A ___________ market is defined as:
“A market in which buyers have the advantage; exists when market prices are relatively low due to an oversupply of property or reduced buyer demand.”
buyer’s
A ___________ market is defined as:
“An active market in which the sellers of available properties can obtain higher prices than those obtainable in the immediately preceding period; a market in which a few available properties are demanded at prevailing prices by many users and potential users.”
seller’s
A ________ market is defined as:
“A market in which a drop in demand is accompanied by a relative oversupply and a decline in prices.”
depressed
True or False? The principle of supply and demand applies to consumer goods and services, but not real property.
False
Which type of market is MOST likely to be characterized by higher prices and a shortage of homes for sale?
- buyer’s market
- seller’s market
- efficient market
- depressed market
seller’s market
The principle of supply and demand states that the price of a commodity varies ________ with demand.
- proportionately
- directly
- independently
- none of the above
directly
According to the principle of supply and demand, the price of a commodity varies ___________ with supply.
- proportionately
- independently
- inversely
- none of the above
inversely
Explain Homogeneous Products and how it relates to real estate market
A homogeneous product would be something like a tube of toothpaste. When you go to the market and locate the correct aisle and then decide which brand and flavor you wish to buy, you can stand in front of the display case, close your eyes and pick one. It really doesn’t matter.
In the real estate market we have anything but a homogeneous product. Therefore, it can be quite difficult to establish a price and say this property is worth the same as another property, when the properties are not the same.
Explain Stable Price and how it relates to real estate market
Many economic goods have prices that vary in a narrow range over time. Maybe these prices generally go up, typically decline, or fluctuate in relatively predictable cycles.
Occasionally, they are subject to short-term spikes or declines in prices due to temporary economic conditions. These changing economic conditions might have physical causes such as an epidemic that kills off millions of chickens, thereby temporarily creating a shortage of eggs. Or perhaps there is a drought or blight that creates a shortage of wheat and therefore prices shoot up.
These situations would have relatively short-term consequences and most likely would be cured in the long term by breeding more chickens and planting more wheat.
However, the Consumer Price Index usually moves along at a sedate pace and moves in measured increments.
The real estate market, by contrast, is a dynamic market that is fluid and subject to constant and immediate change. Changes in real property prices can be triggered by many factors, such as factory closings or natural disasters.
Explain Low Prices and how it relates to real estate market
A market works well and efficiently if product prices are relatively low. This means that the products are available to the masses. Low prices mean universal appeal and open up the door for a multitude of sales.
Real property, on the other hand, is a big-ticket item. In most cases, the purchase of a home is the largest single economic good that a family will acquire. Investment real estate is likewise a substantial investment and a somewhat risky outlay of capital.
Because of the magnitude of the capital investment, real property is rarely purchased with all cash. Generally, a real estate purchase requires a mortgage loan of some type. At best, the process of obtaining a mortgage and closing a real property sale is a lengthy procedure. Complicating matters even further, not all people are creditworthy enough to be able to obtain a mortgage, which means a certain percentage of potential purchasers are shut out of the market.
Explain Transportable Products and how it relates to real estate market
Another characteristic of an efficient market is that goods are readily obtainable and easily transportable.
Real property is unique as an economic good in that it is immovable. It is fixed in location.
If I buy a piece of real property and want to be with it, I have to go where it is! It is stuck in place and a prisoner of its environment, as it were.
Because of this immutable characteristic, real property is particularly sensitive to nearby influences. You buy a piece of real property but you also inherit the neighborhood and the immediate environment surrounding the property.
Explain Organized Market Mechanism and how it relates to real estate market
To work well, a market should be organized and have a specifically constructed mechanism for bringing together buyers and sellers. New York Stock Exchange is a good example of this.
A real property market, however, is a loose affiliation of disparate components. The definable market is different for virtually every piece of real property. Some people simply stick a “For Sale” sign in their front yard and hope for the best.
Others may choose to put an ad in a local paper, or in a national publication like the Wall Street Journal, or on one of the online “for sale by owner” sites that seem to be sprouting up like daisies. Maybe they spread the word that their property is for sale to family members or friends, or post it on Facebook. Some may choose to list a property with a professional real estate agent who puts it into a multiple listing service and utilizes a well-conceived marketing program. Owners of commercial or income producing property may list their property for sale with a commercial broker or advertise in a trade journal.
All of these efforts will result in exposing the property to different segments of the real estate market. This may or may not lead to a sale.
The property may sell in a day, or a month, or a year, or several years. It may sell at a fair price or one that is above or below what it should be.
Explain Large Numbers of Buyers and Sellers and how it relates to real estate market
Again, let’s reflect back to the stock market. If I want to sell a hundred shares of IBM stock, it will only take a phone call and a few seconds to make the sale happen. There are thousands of potential buyers at any given time.
In spite of the best marketing efforts, such as we mentioned on the previous page, there are just not that many potential buyers for any specific property. You may have a house for sale and realistically there might only be two, or three, or 10 people out there with the inclination and the ability to buy your house. If it’s a commercial or industrial property, the potential buyers may be fewer and more widely scattered.
Or, you may be a transferee into a community and are anxious and highly motivated to buy a new house. You may discover that there are very few or no properties available at the moment that meet your requirements or desires.
