MODULE REAL ESTATE CONSULTING

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CHAPTER 4:
Real Estate Economics

During the course of this lesson, you are expected to accomplish the following tasks;
a) Identify the consultant’s role in decision making.
b) Analyze how the consulting practice works.
c) Apply the knowledge gained form real estate economics.

Knowledge of Real Estate Economics

Economics Defined
Given that wants are unlimited and resources
are scarce, economics can be defined as the social
science concerned with problem of using or
administering scarce resources (the means of
producing) so as to attain the greatest or maximum
fulfillment of society’s unlimited wants (the goal of
producing). Economics is concerned with “doing the
best with what we have.” If our wants are virtually
unlimited and our resources are scare, we cannot
satisfy all society’s wants.

The next best thing is to achieve the greatest

possible satisfaction of these wants. Economics is a science of efficiency- efficiency in the use of
scarce resources.

Economic efficiency is also concerned with inputs and outputs. Specifically, it is concerned with
the relationship between the units of scarce and resources that are put into the process of production
and the resulting output of some wanted product.

Full employment and full production Society wants to use its scarce resources efficiently, that is it
wants to get the maximum amount of useful goods and services produced with its limited resources.
To achieve this is must realize both full employment and full production.

Full employment means that all available sources should be employed. No workers should
involuntary out of work; the economy should provide employment for all who are willing and able to
work nor should capital equipment or arable land sit idle. Note we say all available resources should
be employed.

Full production means that resources should be utilized efficiently so as to make the most valuable
construction to total output. Wes should avoid allocating astronomers to farming and experienced
farmers to space researched.

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Introduction to Real Estate Economics

What is Real Estate Economics?

Real estate economics is a study that uses economics principles to analyze the impact that national,
regional, community and neighborhood trends have on real estate values. Real estate is bout people
how their actions affect real estate values. In our society, desire for goods and services frequently
exceeds the supply available. This scarcity gives rise to the idea of economic value.

What Real Estate Economics is Not?

Real estate economics is neither the study of general economics nor a course in the practice of real
estate. Rather, real estate economics is the link between general economic theory and applied real
estate practice. A course in general economic concentrates on how society attempts to use limited
resources to satify the want of this people. However, such as course does not examine how this
affects local real estate markets. On the other hand, a course in real estate practice concentrates on
the specific techniques need to complete a real estate transaction but spend little time discussing the
economic influences that determine whether an investment will be economically profitable over the
years.

Real estate economics helps you to understand what causes fluctuations in real estate activity and
how these changed can affect local real estate markets. With this information, you will be better
equipped to make real estate decisions that will benefit you, your clients and your entire community.

Real Estate Characteristics

The unskilled practitioners and lay persons may fail to understand or distinguish the difference
between real estate and real property, or between the physical aspects of real estate and the property
rights associated with real estate ownership. Others confuse the economic characteristics and the
physical characteristics of real estate.

Real Estate Ownership

Our system of land ownership is the allodial system, consisting of private ownership without the
payment of money or services to other persons. Under the allodial system it is necessary to
distinguish among five terms:

1. Real estate- land and its attachments or physical property

2. Real property- the legal rights associated with landownerships; the interests, benefits, and rights in
herein in the ownership of the physical real estate.
3. Land- economic concept: the surface with all to its characteristics (water, soil, mineral deposits,
and climate)

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4. Personal property- movable items that is not permanently attached or affixed to the land or
building.
5. Fixtures- an article, formerly personal property, installed or attached to land or buildings in
permanent way so that it becomes part of the real estate.

The Concept of the Land

The developer looks at land as capital whereas the planner views land
more in terms of space. Others refer to land only in the physical
sense, such as s former who considers the physical nature
and productivity of the soil.

1. The economic concept- land is defined broadly to

include the surface with all its characteristics: water, soil,
mineral deposits, and other phenomena, including
climate. Besides referring to these natural characteristics, the
economic concept refers to all manmade improvements such as
irrigation ditches, waterways, highways, and streets.

Land as space- ownership of property gives possession and control to a minted space. Some view of
the characteristic of space as the controlling element in landownership. In analyzing the feasibility of a
subdivision, judgments must be made with respect to the space proposed for conversion from, say
agriculture to residential hospital areas cases in point

2. Land as resource- the real estate economist views land as a scarce resource that should be
maximized and allocated to the most efficient use. In considering a multi-family housing project,
questions arise as to the number of the apartments that would ideally be placed on a given tract. If
population density is too high, traffic congestion and the utility of multifamily space would be lowered
by overcrowded facilities, which decrease the enjoyment of the property. On the other hand, if too few
units are allowed, land is not utilized in its most efficient manner.

3. Land as space- the essential problem in considering land as space is to provide for a system of
harmonious mutually attractive land uses. Owners and planners separate incompatible uses of space,
commercial districts and single-family dwelling. At the same time, land must be allocated to the less
desirable uses, such as garbage sites and landfills.

Economic Characteristics of Land

Land serves as both a consumption and an investment good, and is therefore, subject to the economic
law of supply and demand. However, the unique economic characteristics of land complicate the
allocation of land resources to the best possible use.

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Immobility- because land is fixed in place, shortage of land in one location may not be compensated
by a surplus in another area.

Durability- land and buildings are relatively long-lasting assets. It is calculated that a building may last
virtually indefinitely if it is properly maintained and protected from wear and tear and action of the
elements.

Divisibility- because the physical asset land and building is not transferred physically from one buyer
to another, the right to possession, use and enjoyment may be divisible into rights.

Modification- while land is relatively scarce resource, it may be modified considerably. In fact, such
modification permits alternative uses of land as economic conditions change. Thus, a low-rise retail
building gives way to high-rise office building, land used for pastures assumes greater importance as a
shopping center or more dramatically, as population expand, low-
density residences are replaced by multi-family structures.

High capital value- the high value of land accounts for other market
imperfections. Buyers and sellers are not as free to enter and leave
the r6eal estate market. The high cost of housing, which is probably
the most expensive single purchase of the typical family, restricts the
number of families entering the buyers markets.

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KNOWLEDGE OF MONEY AND SUPPLY CREDIT: A Tool for Understanding Real Estate
Economics

The understanding of money and credit will allow the analysis to anticipate changes in the real estate
market and explain to his clients the relationship between current real estate market and conditions
and shifts in the money supply.

THE SUPPLY OF MONEY

Making money is more than just the minting or printing the process.
Money in circulation consists of currency in coins and bills and money
in the form of demand deposits created by the banks. Understanding
the money supply is an important tool for understanding real estate
economics.

What is Money?
1. Money is medium of exchange.
2. Money is a measure of value.
3. Money is a store of value.
4. Money is a standard of deferred payment

REAL ESTATE MARKETS AND INFLATION

Increase in inflation, hurts mortgage lenders because the money they receive from loan repayments
is worthless than the money they originally loaned. Thus, to protect themselves during periods of rapid
inflation, mortgage lenders increase interest rates.

An increase in interest rates causes monthly payments to increase, thereby preventing some potential
real estate buyers from qualifying for loans. This reduces the demand for real estate.

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Inflation can cause depositors in thrift institutions (such as savings and loan associations) to withdraw
their funds and seek higher returns in other money market placements, thereby reducing the money
available for mortgages.

During the inflation, the cost component of construction (land, labor and materials) rises and drives
some people out of the housing market. Increased prices also drive up the cost of purchasing the
basic necessities of life. In effect, this reduces discretionary income- money for luxuries and leisure.

A decline in discretionary income is harmful to the recreational and leisure real estate markets, such
as vacation homes, hotels and tourist attraction.

Tight-Money Policies and Real Estate

The BSP institutes restrictive monetary policy to combat inflation. Inflation itself is frequently caused
by excessive private demand, government deficits, or excess money supply (excess liquidity).

When the BSP fights inflation, it tightens up the money supply, which in turn causes interest rates to
rise as government agencies and corporate borrowers bid against one another for the shrinking
money supply. Higher interest rates cause funds to flow out of savings and loan associations, as
savers go elsewhere seeking higher rates of return. Saving and loans mortgage lending decreases
and the real estate market heads into a recession. The economic term for the outflow of funds from
thrift institutions into corporate and government notes is called disintermediation.

Thus, when the BSP tightens money to combat inflation, housing is one of the first economic sectors
to feel the pinch. This frequently brings cries of discrimination from the real estate industry.

Easy Money Policies and Real Estate

During periods of economic slowdown, the BSP attempts to head off a recession by easing the money
supply. An increase in money and credit may cause spending to increase, and this expansion will
ideally bring an increase in employment. As money and credit become more plentiful, interest rates
tend to decline. These lower interest rates do not immediately attract business borrowers because the
economic downturn still leaves a lingering feeling of pessimism. Meanwhile, private savings may
increase as uncertainty causes people to become cautious and restrict their spending.

RECOVERY IN THE REAL ESTATE MARKET NORMALLY PRECEDES A RECOVERY IN THE

NATIONAL ECONOMY

Because of the size and impact of the construction industry, an increase in home building helps to
lead the economy out of a recession. As home construction picks up employment, income and
spending increase. This in turn generates even more activity and the general business cycle heads for
recovery.

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However, if spending and demand rise beyond the equilibrium point, inflation will recur. If this
happens, the BSP may tighten up the money supply and the mortgage market will start to lose funds,
causing real estate activity to decline. The real estate market cycle in the short run tends to travel
somewhat opposite the general business cycle.

When the general economy is at the top of a boom, real estate activity is usually already declining
because of a lack of credit. When the general economy slows down, real estate activity may increase
as funds flow back into the mortgage market.

For your knowledge:

• https://www.google.com/search?q=Real+Estate+Consultants+Clipart&sxsrf=AOaemvKi5_q32MxpoGspQv8Xg
BncG7gpNQ:1642687415924&source=lnms&tbm=isch&sa=X&ved=2ahUKEwjfmZy_v8D1AhWMOZQKHYt7B
acQ_AUoAXoECAEQAw&biw=1700&bih=821&dpr=0.8https://www.oxfordbibliographies.com/view/document/o
bo -9780199756810/obo-9780199756810-0060.xml

Watch to learn more

• https://www.youtube.com/watch?v=f4o9aPFI3I0
• https://www.youtube.com/watch?v=6tQwmPBG8i0
• https://www.youtube.com/watch?v=ednHdhSSV_8

/www.youtube.com/watch?v=CS-

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