Real Estate Ch.1

Which of the following is not important to the location of most commercial properties? A. access to customers B. visibility C. access to schools D. availability of communications infrastructure

C. access to schools

Which of the following attributes of a home are the most difficult to observe and value? A. land/site attributes B. structural attributes C. location attributes D. financing attributes

C. location attributes

1.5 In what market are rental rates for commercial real estate assets determined? In what market are property values determined?

Commercial real estate rental rates are determined in local user (space) markets, while property values are determined largely in the local property market.

The market in which required rates of return on available investment opportunities are determined is referred to as the: A. Property market B. User market C. Housing market D. Capital market

D. Capital market

Real estate markets differ from other asset classes by having all of the following characteristics except: A. local market B. high transaction costs C. segmented market D. homogeneous product

D. homogeneous product

Of the following asset categories, which has the greatest aggregate market value? A. corporate equities B. mortgage debt C. government debt D. nongovernment real estate

D. nongovernment real estate

(LO) Discuss the primary ways that real estate markets are different from the markets for assets that trade in well developed public markets.

-It is heterogeneous and immobile. -Unique characteristics: age, building design, and location. -Immobile - location is an important attribute. -Markets are localized. Potential users of real property and competing real estate are typically located in the same area. -Highly segmented because of heterogeneous nature.-Potential users of a specific type do not seek to substitute one prop. category for another.-Privately negotiated and have relatively high transaction costs.

1.3 According to Exhibit 1-3, US households own $25.9 trillion in housing assets. Assume this amount does not include rental real estate. On average, what % of the value of the US housing stock is financed with home mortgage debt?

About 40% of the US housing stock is financed with home mortgage debt ($10.3 trillion in mortgage debt divided by $25.9 trillion in housing value)

(S?) How much of the wealth of a typical US household is tied up in housing? How does this compare to the role that assets and investments play in the portfolios of US households?

About a quarter (23%) of total US household wealth is tied up in housing whereas the next largest asset class, corporate stock and mutual fund stock is 17%

(LO) Discuss the value and importance of US real estate compared with the values of other asset classes such as stocks and bonds.

As of September 2005, real estate (including owner-occupied housing, but excluding real estate held by non-real estate corporations) was the single largest asset class in the U.S., valued at approximately $23.4 trillion. Publicly traded corporate equities equated to about $17.2 trillion of the U.S. market. The value of mortgage debt is approximately $11.1 trillion. This is larger than the existing stock of both corporate and foreign bonds and the outstanding value of U.S. Treasury Securities.

What portion of households owns their house? A. Approx 1/3 B. Approx 2/3 C. Approx 1/2 D. Approx 1/4

B. Approximately two-thirds

A market where tenants negotiate rent and other terms with property owners or their managers is referred to as a: A. Property market B. User market C. Housing market D. Capital market

B. User market

Storm water drainage systems are best described as: A. tangible assets B. improvements to the land C. intangible assets D. improvements on the land

B. improvements to the land

(S?) Identify and describe the interaction of the three economic sectors that affect real estate value.

User markets, households and firms compete for physical location and space. Competition determines who obtains use of specific property and how much will be paid for use of property. Capital markets provide the financial resources necessary for the development and acquisition of real estate assets. Government influences interaction between user and capital markets through tax policy, regulations, provisions of services and infrastructure, subsidies and other means.

(S?) Real estate construction is a volatile process determined by the interaction of the user, capital, and property markets. What signals do real estate producers (developers) use to manage this process? What other factors affect the volatility of real estate production?

When real estate market prices exceed the cost of production, this signals producers to build, or add additional supply. As supply of real estate increases, rental rates decline in the user market, which lowers property values and signals the real estate market to slow the production of real estate. -Shocks in the capital markets and the volatility of construction costs add to the volatility of real estate production

The actions of local, state, and federal governments affect real estate values: A. Primarily through user markets B. Primarily through the capital market C. Primarily through their taxation policies D. All of the above

all of the above user, capital markets and taxation policies

(S?) The US represents about 6% of the earth's land surface, or approximately 2.3 billion acres. Who owns this land? What is the distribution of this land among the various uses (developed land, federal land, and forest land)

federal govt: 23% non federal rural area 71% developed land 6% crop land 19% range land 21% forest land 21% other 3%

(S?) Describe the value of US real estate by comparing it to the values of other asset classes (stocks, bonds)

Real estate accounts for the single largest asset class in the US (22.6%). Followed closely by corporate equities (20.3%), then mortgage debt (13.6%), corporate & foreign bonds (11.5%), U.S. treasuries (10.1%), and municipal securities (3.7%).

1.6 Identify 4 ways in which real estate markets differ from the market for publicly traded stocks.

Real estate is a heterogenous product distinguished by its age, building design, and location. Real estate is immobile, and therefore location and its accessibility are important. Real estate is a localized, segmented market due to local competition and the heterogeneous nature of the product. Real estate transactions have high transfer costs, and most deals are privately negotiated.

(LO) Describe the role real estate plays in the portfolios of US households.

Real estate is the single largest asset in the typical U.S. household's portfolio, representing approximately 30 percent of household wealth in September of 2005. In comparison, the total value of corporate stocks and mutual fund shares represents 16 percent of household assets. Pension reserves, excluding stocks, represent 17 percent of household assets. Deposits and money market funds represent 9 percent of household assets.

1.4 Investible assets based on real estate are traded in each of the 4 capital market quadrants. List the 4 quadrants and at least one real estate asset that trades in each.

The 4 capital market quadrants include private equity, private debt, public equity, and public debt. The private equity market includes transactions of real property between individuals, firms, and institutions. Private debt includes the trading of home mortgages. Investors trade real estate companies such as equity REITs in the public equity market. Mortgage-backed securities are traded in the public debts market.

(S?) The term real estate can be used in three fundamental ways. List these three alternative uses or definitions.

The term real estate is used in three fundamental ways. First, its most common use is to identify the tangible assets of land and buildings. Second, it is used to denote the "bundle" of rights associated with the ownership and use of the physical assets. Finally, the term real estate may be used when referring to the industry or business activities related to the acquisition, operation, and disposition of the physical assets.

1.1 What distinguishes real property from personal property?

A major difference between real and personal property is whether or not the property is movable or permanently affixed to the land or structure.

Among the following four categories, which is the largest asset category in the portfolio of the average US household? A. Housing B. stocks C. deposits and money market funds D. government and corporate bonds

A. Housing

(S?) Explain the role of government in real estate at the federal, state, and local levels. Which has the most significant impact on real estate markets?

Local government has the most influence on real estate markets. It affects the supply and cost of real estate through zoning and land use regulations, fees on new land development, and restrictive building codes. It also affects rental rates through the assessment of property taxes. Finally, local government affects the supply and quality of real estate through the provision of community infrastructure and through building codes. The Federal government influences real estate through income tax policy, housing subsidy programs, federal financial reporting requirements, fair housing laws, and disclosure laws. State government generally has the least influence on real estate. State government affects real estate through the licensing of real estate professionals, establishment of statewide building codes, the creation of fair housing and disclosure laws, and through numerous housing related subsides for low and moderate income households. In addition, the state may protect some environmentally sensitive lands from development.

(S?) Real estate assets and markets are unique when compared with other assets or markets. Discuss the primary ways that real estate markets are different from the markets for other assets that trade in well-developed public markets.

Real estate markets differ from the markets for other assets that trade in well-developed public markets in two main ways, heterogeneity and immobility. The heterogeneity is caused by the vastly differing features and characteristics that varies from property to property. Whereas one of the key features that make securities and debt so liquid and easily tradable is their uniformity. Secondly housing is for the most part, immobile, and stuck in its original location, therefore it is subject to the changing environment around it and the owner cannot simply move their house. Next the real estate market is largely localized, whereas stocks and bonds are widely available and distributed globally. Next, the real estate market is highly segmented meaning that people are generally set upon the characteristics that they are searching for and thus easily identified in segments. Lastly, this market is privately negotiated and incurs high transactions costs, since there is so much that goes into the appraisal and transaction of a single property.

1.2 What is the difference between tangible and intangible assets? Does the ownership of real estate involve tangible assets, intangible assets, or both?

Tangible assets are physical assets such as land, automobiles, and buildings. Intangible assets are nonphysical, including patents, financial claims, or contractual agreements. Real estate is a tangible asset, but a bundle of intangible rights is also associated with the ownership and use of the property.