Essentials of Real Estate Economics - SIXTH EDITION
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Essentials
of Real Estate
Economics
SIXTH EDITION
, Dennis J. McKenzie
Richard M. Betts
MAI, SRA, ASA (Real Estate) Property Analyst
Carol A. Jensen
Cabrillo College, Aptos and City College of San Francisco
^CENGAGE
QC3
Learning™
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United StatesBrief Contents
Preface xiv
Acknowledgments xix
About the Authors xx
Dedication xxii
PART I BASIC ECONOMIC BACKGROUND
FOR REAL ESTATE ANALYSIS I
1 INTRODUCTION TO REAL ESTATE ECONOMICS 2
2 REVIEW OF THE ECONOMIC PRINCIPLES OF CAPITALISM 8
3 GOVERNMENT'S ROLE IN THE ECONOMY 38
4 MONEY, CREDIT, AND REAL ESTATE 76
5 IMPORTANT ECONOMIC FEATURES OF REAL ESTATE 116
PART II UNDERSTANDING REAL ESTATE MARKETS 149
6 REGIONAL AND COMMUNITY ANALYSIS 150
7 COMMUNITY GROWTH PATTERNS 176
8 NEIGHBORHOODS: CLUSTERS OF LAND USE AND VALUE 204
9 HOUSING MARKETS 230
10 COMMERCIAL AND INDUSTRIAL MARKETS 266
I I RURAL AND RECREATIONAL REAL ESTATE MARKETS 300
iiiBrief Contents
PART I8B MAJOR INFLUENCES O N REAL ESTATE
12 THE ECONOMICS OF REAL PROPERTY TAXATION 334
13 LAND-USE CONTROLS 360
14 REAL ESTATE DEVELOPMENT 388
15 REQUIRED GOVERNMENT REPORTS 410
PART IV REAL ESTATE INVESTMENT 427
16 SUMMARY OF REAL ESTATE INVESTMENT PRINCIPLES 428
17 INCOME TAX ASPECTS OF INVESTMENT REAL ESTATE 454
18 APPLIED REAL ESTATE ECONOMICS 478
19 ANTICIPATING CHANGE 496
Answers to the Reviewing Your Understanding Questions 529
Glossary 534
Index 543Contents
Preface xiv
Acknowledgments xix
About the Authors xx
Dedication xxii
PART I BASIC ECONOMIC BACKGROUND
FOR REAL ESTATE ANALYSIS I
I INTRODUCTION TO REAL ESTATE ECONOMICS 2
WHAT IS ECONOMICS? 3
WHAT IS REAL ESTATE? 3
WHAT IS REAL ESTATE ECONOMICS? 4
WHAT REAL ESTATE ECONOMICS IS NOT 4
WHY IS REAL ESTATE ECONOMICS SO INTERESTING? 5
WHY SHOULD YOU STUDY REAL ESTATE ECONOMICS? 5
A GENERAL OVERVIEW 6
CHAPTER OUTLINES 6 h
A FINAL WORD 7vi Contents
REVIEW OF THE ECONOMIC PRINCIPLES
OF CAPITALISM 8
2.1 BASIC ECONOMIC CONCEPTS 9
8
Economics Revisited Choice and Opportunity Cost: No Free Lunch
• Economics Is an Inexact Science ° Economic Solutions May Contain Value
Judgments • The Different Economic Systems ° Real World Economies
• No Economic System Is Perfect • Basic Principles of Pure Capitalism
• How Pure Capitalism Answers the Questions What, How, and for Whom
• Modern Mixed Capitalism in the United States
2.2 ECONOMIC PRINCIPLES IN ACTION 17
The Factors of Production ° Rent, Wages, Interest, Profit,
and Income a The Circular Flow of the Economy
2.3 MARKETS AND PRICES 21
What Determines Prices and Output? ° Perfect versus Imperfect
Markets • Demand and Supply: The Classic Answer to Price
Determination • Demand • Supply • Supply and Demand Together
Determine Output and Price Levels • Elasticity • The Flow of the
Economy Revisited • Impact of International Trade • International Trade
Concepts • International Trade: Is Self-Sufficiency Better? • The Economic
Theory Sounds Good, But ...
CASE & POINT—ADAM SMITH, ECONOMIC PHILOSOPHER 34
GOVERNMENT'S ROLE IN THE ECONOMY 38
3.1 THE REAL WORLD OF MARKETS AND GOVERNMENT 39
Government Intervention in the Economy • How Government
Economic Intervention Changed • Flow of the Economy—The Government
Included
3.2 MEASURING THE PERFORMANCE OF THE ECONOMY 43
National Income Accounting • The Details Behind the GDP Totals
• Other Income Measurements • Keeping Up with National Income
• The Importance of Employment Data ° Other Economic Data • Foreign
Ownership of U.S. Businesses and Real Estate ° Composition of Foreign
Investment
3.3 CHANGES IN ECONOMIC ACTIVITY 55
The Phases of the Business Cycle • Causes of Business
Cycles 8 Real Estate Cycles ° Using Economic Indicators • Forecasting
Changes in Economic ActivityContents vii
3.4 GOVERNMENT TOOLS TO FIGHT ECONOMIC PROBLEMS 61
Fiscal Policy • Monetary Policy 8 The Theory Sounds Good, but
There Are Some Problems • Automatic Stabilizers • The Measurement
Problems
CASE & POINT—LAFFER CURVE 74
4 MONEY, CREDIT, AND REAL ESTATE 76
4.1 THE SUPPLY OF MONEY 77
What is Money? • What Makes "Good" Money? • Money Today • Credit
Cards Are Not Money • Depository Institutions Create Money • How
Fractional Reserves Create Money a Federal Deposit Insurance • Too Much
Money Can Cause Inflation and Cause Harm • Real Estate Markets and Inflation
• The Importance of Controlling the Supply of Money
4.2 THE FEDERAL RESERVE SYSTEM 88
Purpose and Structure of the Federal Reserve System • How the Federal Reserve
Attempts to Control the Money Supply • Major Tools of the Federal Reserve
• Federal Funds Rate • The LIBOR Rate • A Review of the Major Federal
Reserve Tools
4.3 H O W THE ACTIONS OF THE FEDERAL RESERVE AFFECT
REAL ESTATE 96
Tight-Money Policies and Real Estate • Does the Fed Discriminate Against Housing
When It Tightens Money? • Easy-Money Policies and Real Estate • Recovery in
the Real Estate Market Normally Precedes a Recovery in the National Economy
• Mortgage Market Reforms
4.4 THE FED'S EMERGENCY POWERS 100
Trust and Counter-Party Risk • The Panic and the Fed's Response
CASE & POINT—THE SAVINGS AND LOAN CRISIS OF THE 1980s
AND ITS SUCCESSOR, THE MORTGAGE SECURITIES COLLAPSE
OF 2007 112
5 IMPORTANT ECONOMIC FEATURES
OF REAL ESTATE 116
5.1 ECONOMIC CHARACTERISTICS OF REAL ESTATE MARKETS 117
Does This Mean That the Principles of Supply and Demand Do Not Work in Real
Estate Markets?
5.2 H O W REAL ESTATE MARKETS REACT TO CHANGES IN DEMAND 122
What Causes Supply and Demand for Real Estate to Change?
• Foreign Ownership of U.S. Real Estate • Why Have Real Estate Professionals
• Impact of the InternetContents
5.3 ANALYZING DEMAND AND SUPPLY USING GRAPHS 130
Demand • Supply • Equilibrium • Why Use Demand and
Supply Graphs?
CASE & POINT—TAKING DEMAND AND SUPPLY GRAPHS
ANOTHER STEP 140
PART II UNDERSTANDING REAL ESTATE MARKETS 149
6 REGIONAL AND COMMUNITY ANALYSIS 150
6.1 WHY AND WHERE COMMUNITIES FORM 151
8
The History of Communities What Determines Community
8
Location? Reasons for American City Locations • How the City's
Origin Fits In
6.2 WHY THE COMMUNITY GROWS 156
8
The Community as an Economy Setting Community Goals
6.3 H O W TO STUDY A COMMUNITY 163
Traditional Community Analysis • Basic Employment Reviewed
8
Regional Economic Studies 8 The Gatekeeping Syndrome
8
Sources of Data
CASE & POINT—"WHERE ARE WE MOVING TO?" 173
COMMUNITY GROWTH PATTERNS 176
7.1 LAND-USE PATTERNS 177
How Economics Determines Land Use 8 Why Patterns?
8
What Are the Rules? • The Noneconomic Factors in
Land Use
7.2 LOOKING AT THE STRUCTURE OF COMMUNITIES 180
8
Why Study Community Land-Use Patterns? Viewing the Small
8 8
Community Simple Circles—Accessibility The Importance of
Topography • Transportation 8 The Existing City: Origins
7.3 MODERN CITY GROWTH PATTERNS 186
8
Proximity Versus Accessibility The Complex City 8 Enter the Wedge
8 8
Political and Social Factors Community Attitudes 8 The Results
8
Other Views 8 The Effects of Transportation Change 8 Adding in
Technology
CASE & POINT—FUTURE ISSUES IN CITY LAYOUT 202Contents ix
8 NEIGHBORHOODS: CLUSTERS OF LAND USE AND
VALUE 204
8.1 THE NEIGHBORHOOD AS THE BASIS OF VALUE 205
What Is a Neighborhood? • Neighborhood, Location, and Property Values
8
Neighborhood Boundaries
8.2 NEIGHBORHOODS AS BAROMETERS OF CHANGE 208
Forces for Change 8 Signs of Neighborhood Change
• The Meaning of It All
8.3 AS NEIGHBORHOODS AGE 216
Progressive Decay •> Wow! What Happened?
8
The Rehabilitation Cycle 8 Learning to Fight Decay
CASE & POINT—NEIGHBORHOOD PRESERVATION:
TWO VIEWPOINTS 228
9 HOUSING MARKETS 230
Housing Markets
9.1 THE DEMAND FOR HOUSING 231
8
Population Income and Financing ° Changes in Taste
9.2 THE SUPPLY OF RESIDENTIAL HOUSING 244
Evaluation of Supply 8 Is the Housing Suitable?
8
Available Supply 8 The Future of Construction
9.3 THE GOVERNMENT A N D HOUSING 255
8
Regulating Housing Markets Encouraging Housing Production
CASE & POINT—GATED COMMUNITIES—AMERICAN APARTHEID? 265
I 0 COMMERCIAL AND INDUSTRIAL MARKETS 266
10.1 BUSINESS REAL ESTATE 267
Investors versus Users • The User Viewpoint
8
The Investor Viewpoint
10.2 MAJOR VALUE INFLUENCES 271
8
The Economic Issues The Governmental Issues
8
Special Issues
10.3 COMMERCIAL PROPERTY 277
What Are the Major Forces? 8 What Are the Patterns of Commercial Land
Use? 8 Interesting Changes • Is Your Local Commercial Area Changing?
8
Making a Simple Market SurveyContents
10.4 INDUSTRIAL PROPERTY 289
Theory of Industrial Location ° The Changing Pattern of Industrial Locations
8
The Industrial Market Study
CASE & POINT—THE REVOLUTION IN RETAILING 297
I I RURAL AND RECREATIONAL REAL ESTATE
MARKETS 300
I I.I FARMLAND MARKETS 301
Key Factors ° Major Trends
I 1.2 RURAL HOMES 315
The New Subdivision • The Older Home
11.3 TIMBER AND OTHER RESOURCE LANDS 321
Key Factors ° Major Trends
CASE & POINT—SHOULD THE GOVERNMENT SUBSIDIZE RESOURCE
DEVELOPMENT? 330
PART III MAJOR INFLUENCES O N REAL ESTATE
12 THE ECONOMICS OF REAL PROPERTY
12.1 THE PRINCIPLES OF TAXATION 335
Taxes Can Be Used to Redistribute Wealth • The Theory of Taxation
8
Major Taxes and Expenditures • Is the Tax Progressive, Proportional, or
Regressive?
12.2 EVALUATING THE PROPERTY TAX 343
Local Government and the Property Tax • Who Really Pays the Property
Tax: Owners, Tenants, or Consumers? ° Property Taxes and Capitalized
Real Estate Values ° Is the Property Tax Regressive? • Property Taxes
and Land Usage
12.3 PROPERTY TAX REFORM 350
8 8
Political Realities ° Current Reforms Possible Future Reforms Other
Taxes Affecting Real Estate
CASE & POINT—TAX TALK ... SAY WHAT YOU MEAN! 358Contents xi
I 3 LAND-USE CONTROLS 360
13.1 TYPES OF LAND-USE CONTROLS 361
8
Private Land-Use Controls Easements Public Land-Use Controls 8 Police
Power 8 Eminent Domain 8
Government Spending as an Influence on
Land Use
13.2 PRINCIPLES OF URBAN PLANNING 368
8
Definition of Urban Planning Creation and Implementation
8
of Urban Planning The Need for Regional Planning
13.3 RECENT TRENDS IN LAND-USE CONTROLS 374
Preventing Premature Subdividing 8 Pollution and Environmental
Regulations 8 Slow-Growth and No-Growth Policies 8 The Creation
of New Towns • State and Federal Intervention in Land-Use Controls
8
Inclusionary Zoning • Land-Use Controls and the Real Estate
Industry
CASE & POINT—PROPERTY RIGHTS: T W O VIEWPOINTS 385
I 4 REAL ESTATE DEVELOPMENT 388
14.1 REAL ESTATE CONSTRUCTION 389
8
Construction Activity Characteristics of the Homebuilding Industry
14.2 THE DEVELOPMENT A N D BUILDING PROCESS 394
Land Development and Construction 8 When This Process Is Ignored,
Overbuilding Can Occur 8 Steps in Construction 8 Green Building 8 The
Cost of Construction Delays and Impact Fees
CASE & POINT—REAL ESTATE ECONOMIC HISTORY: CALIFORNIA IN THE
1980S: "THE BUILD-AND-THEY-SHALL-COME SYNDROME," FOLLOWED BY A
DECLINE IN THE I 9 9 0 S - 2 0 0 0 S 406
1 5 REQUIRED GOVERNMENT REPORTS 410
15.1 TYPES OF REQUIRED GOVERNMENT REPORTS 411
Federal Legislation • State Legislation • Local Legislation
15.2 COSTS VERSUS BENEFITS 417
Defining Costs and Benefits 8 Analyzing the Costs
8
Analyzing the Benefits 8 The Trend
CASE & POINT—HOW WET IS WET? 425xii Contents
PART IV REAL ESTATE INVESTMENT 427
I 6 SUMMARY OF REAL ESTATE INVESTMENT
PRINCIPLES 428
16.1 BASIC INVESTMENT PRINCIPLES 429
8
The Key Investment Factors The Investment Decision
16.2 REAL ESTATE CASH FLOW ANALYSIS 434
The Steps in Annual Cash Flow Analysis ° Before-Tax Cash Flow • Tax
Benefit Analysis 8 Net Spendable Income
8
Multi-year Analysis • Summing Up Cash Flow Analysis
16.3 ESTIMATING PRICE AND RATES OF RETURN 441
The Offering Price • Amount of the Cash Investment
8
Computing Rates of Return
CASE & POINT—CASE STUDY—OLDER 10-UNIT APARTMENT BUILDING 452
I 7 INCOME TAX ASPECTS OF INVESTMENT
REAL ESTATE 454
17.1 MAJOR INCOME TAX ADVANTAGES 455
Investor versus Dealer
17.2 BASIS AND DEPRECIATION 457
How Much Is Deductible? • How Does It Work?
17.3 PASSIVE LOSS RULES 460
Passive Income/Loss Offset Rules • $25,000 Exception to the Passive Loss Rules
17.4 CALCULATING AND DEFERRING GAIN 464
A. Calculating Gain and Taxes Owed on Income Property
8
B. Use of an Installment Sale to Spread Out Taxable Gain
8
C. Use of a Like-Kind, Section 1031 Exchange to Defer Gain
CASE & POINT—WHY SHOULD INTEREST O N HOME LOANS BE
DEDUCTIBLE? 474
I 8 APPLIED REAL ESTATE ECONOMICS 478
18.1 REAL ESTATE INVESTMENT VARIABLES 479
Expectations • Multiple Choices • Determining Investment Characteristics
8
Fancy Footwork
18.2 STEPS IN REAL ESTATE DECISION MAKING 483
Steps in Analyzing an Improved Property • Steps in Analyzing Alternatives for
Unimproved Real Estate Parcels
CASE & POINT—WHERE ARE WE IN THE REAL ESTATE CYCLE? 494Contents xiii
I 9 ANTICIPATING CHANGE 496
19.1 THE MAJOR ECONOMIC ISSUES 497
Recovery from the Financial Collapse of 2007
8
The Consequences of the Financial Collapse of 2007
19.2 NATIONAL CHANGES 509
8
Demographic Issues Political/Legal Issues
19.3 THE UNCERTAIN FUTURE 519
Telemobility 8 Population Growth » Where Does This Situation Leave The
Real Estate Industry?
Answers to the Reviewing Your Understanding Questions 529
Glossary 534
Index 543You can also read
