Real Estate Test 5

In a fixed rate mortgage the interest rate is re-established usually 5 to 7 years after the origination.

False

In fully amortizing loans, such as fixed-rate mortgages, other than the interest rates borrowers have to pay large balloon payments when the loan expires.

False

Property flipping is the strategy of buying a property and producing improvements which, in a very long period of time, will appreciate. With property flipping investors make therefore profits in the long run.

False

Risk and return in finance are negatively related, that is high risk investments have low rate of returns.

False

The appreciation in property value, which we can calculate through "After-Tax Equity Reversion" (ATER), is a major disadvantage of investing in income producing properties.

False

According to the what is sometimes referred to as the "universal formula" in finance, the present value (PV) of an asset is equal to the discounted future value (FV) of the asset, i.e. PV = FV*d, where d = 1/(1+ i) and i represents the interest rate.

True

Alternatively to fixed rate mortgages, in the real estate financing market, different types of loans are available, such as two-step mortgages and adjustable-rate mortgages (ARM).

True

Amortization means the repayment of a loan distributed into multiple cash flow installments.

True

BONUS: If you answer "True", you will get 2 additional points, if you answer "False" you won't get them.

True

BONUS: In the financial decision making process, investors compare the expected benefits from a proposed course of action with the expected costs arising from that course of action.

True

BONUS: There are multiple causes for the suburbanization process, among others fiscal, social, environmental, and technological factors.

True

Cunningham (2007) [Growth Controls, Real Options, and Land Development] analyzes the land development in the Seattle area. He finds that the introduction of the Urban Growth Boundary (UGB) was successful in achieving the purpose targeted, that is reducing development in designated rural areas and increasing construction in urban areas.

True

In adjustable-rate mortgages (ARM), the interest rates are subjected to changes with the general interest level in the economy. They interest rates in ARM change more than once during the loan period.

True

Prepayment is a concept that describes the fact that mortgage loans are paid before the expiration of the full period.

True

The Discounted Cash Flow model (DCF) is a valuation method useful for the feasibility analysis of investment in income producing properties. It uses future free cash flow projections and discounts them to arrive at a present value estimate.

True

The interest rate can also be thought of as the intertemporal price of money.

True

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) equal to zero.

True

The net present value (NPV) decision rule employs the wealth maximization concept, that is investors' ultimate goal is to maximize their wealth.

True

Urban sprawl can take many forms.

True

In which of the following scenarios can the value of a real estate improvement be negative? Hint: Think of the total value T as being defined as T = L + I (where L is the value of the land and I is the improvement.) This question then asks under what conditions for L and T is I negative?

When the value of the land if vacant exceeds the value of the land as improved (T < L).

Which of the following terms refers to industries that bring income into a region from beyond its borders?

economic base

BONUS: From a policy perspective, evaluation of risks for financial markets associated to the rapid growth of the real estate mortgage market should involve: I.Understanding the ability of lenders and investors to accurately assess the risk of subprime lending, given the absence of prior experience II.Considering changes on the risk of contagion from larger domestic housing finance markets via bond markets III.Analyzing how the growth in mortgage bond markets may impact other markets

All of the above

A(n) ____ (pick one: lump sum | annuity | interest rate | loan) is a series of equal cash flows, a series of payments made at equal intervals.

Annuity

Uncertainty arising from changing economic conditions that affect an investments ability to generate returns is known as _______ (pick one: business risk, purchasing power risk, liquidity risk, financial risk), while uncertainty arising from the possibility of defaulting on borrowed funds used to finance an investment is known as _______ (pick one: business risk, purchasing power risk, liquidity risk, financial risk).

Business risk, financial risk

Suburbs are characterized by ____ (pick one: high urban density | car dependency |multi-functional uses).

Car Dependency

____ (pick one: compounding | discounting) is the process of finding future 'values' while ____ (pick one: compounding | discounting) is the process of finding present values.

Compounding, Discounting

Select the right sequence of true and false statements, as presented below: I. In most cases, real estate is financed by means of an unsecured loan. II. A key to minimizing risk in home loans is for the lender to have extensive local market knowledge. III. The lender evaluates an applicant's creditworthiness by examining sources of income and credit history. IV. A mortgage loan with an LTV (loan-to-value ratio) of 50 percent is riskier than one with an LTV of 80 percent.

F,T,T,F

Consider the fact that investments are irreversible, therefore there is a trade of between waiting and taking action. In this situation, it is better to place an investment when the costs of deferring and delaying a project are lower than the expected value of waiting.

False

Which statement is NOT true?

Financial feasibility of a residential project is not dependent on the absorption rate of the market.

The ____ (pick one: present value formula | future value formula) allows you to determine what an amount of money in hand today will be worth some time in the future (if it increases at a constant rate).

Future Value Formula

Which of the following statements are true about urban sprawl? I. Urban sprawl refers to the tendency toward lower city densities as city footprint expands II. The expansion of the highway system is negatively associated to urban sprawl III. Increase in congestion and air pollution and the loss of open space are considered to be amongst sprawl's negative externalities (disadvantages). IV. Patterns of urban sprawl in the US have remained similar since the 17th century

I and III

As an alternative to the fixed-rate mortgage, borrowers can often obtain an adjustable rate mortgage which has an initial interest rate below that of fixed-rate loans. Which of the following statements best explains the rate difference?

Lenders accept a lower initial rate because the borrower bears some of the risk of future interest rate changes

A ____ (pick one: lump sum | annuity | debt | mortgage) is a security instrument backed by a collateral.

Mortgage

The percentage of a borrower's gross monthly income required to meet monthly housing expenses (only) is called the ____ (pick one: current | liquidity | permanent income | mortgage debt | quick | solvency) ratio.

Mortgage debt

The payment of a fully amortized mortgage loan is divided in the ____ (pick one: principal | agent | debt) and the ____ (pick one: discount | interest | debt).

Principal, Interest

Suburbanization is the ____ (pick one: process | end result) of population and employment moving outside the central urban core to the outskirts (suburbs), whereas the urban sprawl is the ____ (pick one: process | end result) describing the metropolitan landscape.

Process, End result

In their study about the rise in mortgage defaults in the US in 2006-7, Mayer et al (2009) [The Rise in Mortgage Defaults] find out: a. Following the subprime mortgage default crisis, house price declines have permanently eroded home equity and contributed to higher defaults among borrowers with prime mortgages b. Because down payments for "subprime" or "near-prime" became so small, when house prices declined, many borrowers had little or no equity in their properties and thus less incentive to repay their mortgages c. In the period preceding the housing meltdown, underwriting deteriorated along several dimensions: more loans were originated to borrowers with very small down payments and little or no documentation of their income or assets d. The complexity of sub-prime and Alt-A loans was the primary culprit for the skyrocketing delinquency and foreclosure rates

a, b, and c

According to the net present value decision rule, an investor who is considering a project which has a net present value of $1 would:

accept the investment.

Select the correct answers in reference to the concept of real option: (Check box answer)

an owner of vacant land holds the right to own a building of given size for an exercise price equal to the costs of construction. a real option is the right — but not the obligation — to undertake certain business initiatives, such as developing land, building structures.

In their study about the Vancouver real estate market, Bulan, Mayer and Somerville (2009) [Irreversible investment, real options, and competition: Evidence from real estate development] finds that: (Check box answer)

builders delay development during times of greater idiosyncratic uncertainty in real estate prices. with higher return volatility, investors are less hazardous and tend to take less risks.

Beltway highways tend to

further the development of multiple nuclei growth

BONUS: In terms of the "universal formula" of finance (PV = FV*d , see above for a definition of terms), -- all else equal -- the higher the interest rate,

the smaller the discount factor.

The primary difference between a secured and unsecured loan is

whether the lender has a claim on specific assets of the borrower in the event of default.

BONUS: A temporal continuum of a specific type of interest rates, e.g. risk-free interest rates, is commonly referred to as ____ or ____ (choose two: rate horizon, yield curve, interest rate arc, term structure, money space). (Check box answer)

yield curve term structure