Chapter 12 Influences on Real Estate Values

This first list would include things such as how convenient is the subject location in regard to:

Shopping Schools Employment Houses of worship Cultural facilities Recreational facilities Educational facilities Restaurants Police protection Fire protection

Environmental Restrictions

Environmental restrictions promulgated by various levels of government - from local all the way up to federal - can be source of controversy and disagreement. On one hand, these regulations can produce a better quality of life and hence lead to higher property values while preserving beauty and natural resources for future generations of residents. However, they can halt new construction in certain areas and restrict some properties from any future development. We've all heard of properties that undergo a development plan review when it is discovered that the property development could impact an endangered species of animal or plant. Some of these situations result in lengthy and expensive litigation. Because environmental restrictions can be issued by all levels of government, it can be difficult to keep track of them all and some jurisdictions may overlap. There's no doubt that the trend is toward more environmental restrictions and public consciousness. Remember now, that we're talking about external market influences, that is, influences that are outside the boundaries of the subject property. We're not talking about a situation within our subject property. However, if a property backs up to a state park or land that has been stipulated to be forever wild, it could very possibly affect its value.

Elements of Value

For any economic good to have value it must possess four elements: Desire Utility Scarcity Effective purchasing power Utility and scarcity are supply factors. Desire and effective purchasing power are demand factors. It doesn't matter whether it is a stock certificate, a bar of gold, a pound of salami or a two-unit dwelling. All four of these elements must be present in order for an item to have value.

Rental Rates

These next three categories (rental rates, rental vacancies, and expense levels) apply primarily to commercial properties, because these types of properties are often valued based on their income and expenses. When appraising any type of income producing property, the value is primarily a function of the amount of net income a property is able to produce. This is the total income minus expenses. Therefore, the rental rates in an area will impact property values. This applies in both residential apartments and in the rental of commercial or industrial space. If I have an apartment building that produces $30,000 annual net income, it certainly should be worth more than one that produces a net income of $20,000. In residential appraising usually we consider the amount of rent per apartment. In some cases, for purposes of comparison, we break it down into rent per square foot of living area, per month. Retail space is usually compared on the basis of dollars per square foot per year. Class A office space in an area may rent for $15 to $20 per square foot per year. A property that is more valuable should be able to attract more rent. A property that can produce more rent should be worth more. Rent and value go hand in glove.

National Oceanic & Atmospheric Administration (NOAA):

This agency is charged with monitoring coastal habitats, such as estuaries and reefs. It also monitors development, water and sediment contamination, water diversion for industrial, agricultural, sedimentation, and dredging and filling activities. They also review coastal development and water projects that may alter or destroy habitat and recommend measures to offset development and use impacts.

Influences on Value

Value is created and sustained by external market forces. Value is not created by appraisers. Value is not created by a buyer or a seller. Our task, as appraisers, is to research and analyze the property and the market, and develop and report an opinion of this value. There are four main categories of external market forces that affect real property: Governmental Economic Social Environmental Unfortunately, these forces are intangible and hard to quantify. They overlap in some markets and it is hard to separate and accurately measure the impact of each one.

Cultural

Are there cultural facilities available in the community? This may be an additional attraction that would elevate one area over another in the eyes of a typical purchaser. This could include many things such as: Museums Art galleries Theaters Libraries That is why we see an increasing trend in some areas towards people moving out of the suburbs and moving back into the metropolitan areas where there is a concentration of cultural facilities. This is more common among Baby Boomers or empty nesters who have more money and/or time to spend on entertainment.

Zoning

A property's zoning is one of the strongest determinants of its value. I'm sure you understand that a property could have different values depending on whether it was zoned for and permitted only one unit residential use, commercial or retail use, or industrial use. An acre could be worth $20,000 or $200,000, depending upon the allowed usage under zoning. Of course, some parts of the country do not have zoning at all. In some areas, such as the city of Houston, Texas, land uses are controlled primarily by deed restrictions. The first citywide zoning regulations were created in New York City in 1916. The purpose of these regulations was to separate the residential areas from commercial areas. Later regulations in other areas restricted specific items such as setback regulations and story height. Local zoning laws and regulations appeared in most areas in the country in the 1960s and 1970s. As part of your zoning research on a property, you also need to investigate the procedures for and possibilities of getting a zoning change or exception. Perhaps a property is zoned single-unit residential, but many other properties in the neighborhood have been able to get a variance to construct multi-unit properties. Zoning regulations will also dictate minimum lot sizes. An area in which zoning permits nothing less than five-acre sites will probably result in different price levels for housing as opposed to an area which permits four houses to an acre. However, in some areas this type of "exclusionary" zoning will create an imbalance in the marketplace because it will shorten the supply of available land, and it may impact the demand because the larger parcels will be priced too high. There are myriad possibilities.

Family Formations

Average family size in America has been decreasing steadily over the years. In the 1900s and 1930s people had large families. In the 1950s and 1960s the average family size was lower. The birth rate has been declining ever since. Around the year 2000, the average U.S. family size dropped below 3.0 persons for the first time ever. For the last several years, the average U.S. family size has held steady at 2.53 to 2.54. Family households (defined as married couples or a man or woman living with other relatives) declined from 81% of all households in 1970 to 68% in 2010. Married couple households with their own children declined from 40% of all households in 1970 to 23.5% in 2010. In 2010, 25.8% of households were occupied by one person (56% of whom are women) In 2010, 28.1% of households were occupied by married couples with no children In 2010, 5.2% of households were occupied by unmarried partners Add those up and you get the staggering statistic that almost 60% of current households are occupied by one or two people! One would think this would have resulted in changes in new construction between 2010 and the present. The median sized new house built in 2010 had 2,169 square feet, which is over 100 square feet larger than the median new house in 2000, and over 250 square feet larger than the median new house in 1990. However, according to the U.S. Census Bureau, the median size of new homes increased annually starting in 2010, peaking at 2,467 square feet in 2015. The median size decreased slightly in 2016 to 2,422 square feet, and for the partial year 2017, it declined even further to 2,388 square feet. It remains to be seen whether this decline is a trend, or just a temporary "correction." Worth noting is that the 13.7% increase in the average new house size between 2010 and 2015 happened against the backdrop of a nationwide decline in average household size.

Types of Employment

Beyond the nitty-gritty of actual dollars of wages, we need to consider the types of employment that are available in an area. Is the primary employment heavy industry or manufacturing? Is it high-tech professional employment? Agricultural? Government work? Educational facilities? Basic industries consist of the major employers in an area. They are net importers in that they produce goods that are shipped outside the region and bring more money back into the region. Service industries are those which produce services rather than goods. People in the service industry would include real estate brokers, appraisers, insurance agents, restaurant owners and auto mechanics. Much of the service industry income comes from money earned by people in the basic industries. There is a multiplier effect in that each job in a basic industry supports two to three jobs in the service industries.

This second list consists of physical or environmental features that shape the nature of the area. They tend to have a more general impact and affect most properties equally. This list would include:

Climate Topography Soil conditions Nature of improvements in the area Density Natural hazards Man-made hazards

Lifestyle Changes - Community Living

Community living embraces the idea of shared responsibilities. Examples include various types of ownership in which there are common areas and facilities for the benefit of all the residents. This might include: Condominiums Cooperatives Planned Unit Developments (PUDs) Retirement villages Gated communities Resort complexes There can be many benefits to this lifestyle including: Shared maintenance Common recreation areas Companionable activities Increased security

Taxes

Continuing with our list of governmental influences on real property value, let's look at taxes. Taxes can certainly be an important consideration when determining a property's value. Let's start with the local property tax. If you own and operate an income-producing property, property taxes generally make up a significant portion of your operating expenses. The amount of the taxes and the tax rates vary from community to community. Some areas just have a reputation as being "high tax" areas. It does make a difference - it's only common sense. Property taxes are not the only kind of taxes that affect property values. There are other kinds of taxes, as well. There are state sales and income taxes and, in most areas, there are county, town and/or city taxes. Some states have no state income tax. Of course the states still need to generate revenue; they just do it in different ways. In recent years, New Hampshire gained residents and increased values in some cases due to the fact that they had no state income tax and no state sales tax. The cost of living was lower because of that factor and induced some people to move to New Hampshire from adjoining states such as Massachusetts, where the tax rates were higher.

Density

Density means how intensively has the area been developed? How many structures are there per acre? Or how many people are there per square mile? What is the average lot size in the area? In many cases this is a function of zoning. Zoning may permit a minimum lot size of two acres per dwelling unit. In another area, the zoning may permit four units per acre. However, we said zoning is a fairly recent phenomenon. The area may have been built up for a hundred years and everyone is on one-quarter acre of land. In urban areas with high-rise buildings, the density may be hundreds or thousands of people to an acre. Density is just one more measure when we are trying to characterize the nature of a market area. Is it an urban area with high density? Or is it an urban area that has a relatively low density of development, as compared to other cities? Is it a suburban area with a medium density of development? Is it more or less densely developed than comparable suburban areas? Are there open spaces? Perhaps the area has been developed with cluster housing, where the buildings are clustered more closely together but then there are mandatory open spaces left for the common enjoyment of the residents. Obviously, if it is a rural area, we would expect to find a low density of development. There may be houses or farms where the typical lot sizes range from 50 acres to a hundred acres or more.

Desire

Desire is defined as "A purchaser's wish for an item to satisfy human needs (e.g. shelter, clothing, food, companionship) or individual wants beyond essential life-support needs." I have had a burning desire for quite a while to own a Porsche 928 Turbo (preferably red). Unfortunately, it is an empty dream. It is a desire but can't really be called demand - I lack the purchasing power to back up my desire. So for any economic good to have value there must be desire. Imagine one acre of desert in the middle of hundreds of thousands of acres of desert - and the nearest road is 80 miles away. It is possible (nay, likely) that no one has any desire to purchase or own this acre. If no one wants to buy it, there is no value. It is worthless land.

Environmental Protection Agency (EPA). Some of their major duties include:

Developing and enforcing regulations Offering financial assistance Performing environmental research Sponsoring voluntary programs and partnerships Furthering environmental education Publishing information

State and Local Environmental Agencies

Each state has its own agency that controls environmental issues. For example, in New York it is called the Department of Environmental Conservation. In Colorado it is called the Colorado Department of Public Health & Environment. Here is a website that will help you find the appropriate department in your state. Click here. The states vary considerably in the amount of regulation and in the degree of enforcement. You need to be aware of current public policies in that regard. You'll also find environmental regulations in some areas on a county or a regional basis. There may also be smaller areas such as towns, villages, or neighborhoods that are subject to specific environmental regulations.

Economic Forces

Economic forces are the second major category of external forces that influence real estate values. There is also a long list of possible items in this category. Economic forces tend to be the most powerful and exert the most influence on value of any of the four categories. Once again, the list is not all-inclusive but might include: National economy Consumer Price Index Interest rates Availability of financing Wage rates Types of employment Unemployment rates Cost of construction Rental rates Rental vacancies Expense levels

Effective Purchasing Power

Effective purchasing power is defined as "The ability of an individual or group to participate in a market, i.e., to acquire goods and services with cash or its equivalent." Desire must be backed up by the ability to perform. Otherwise, it is a mere whimsy, like my dream of purchasing a Porsche. There may be a lot of people who would like to buy a particular house, or a piece of land, but there is no value if they can't follow through. NOTE: Effective Purchasing Power is also sometimes referred to as "Effective Demand."

Environmental Influences

Environmental influences are the fourth and final category of external market forces that may impact values. This includes a potentially long list of factors that might, on occasion, influence values. These influences are sometimes called physical or locational influences. They deal with physical things that may decrease or increase values due to their location near the immovable subject property. I'd like to separate these factors into two lists. The first is a list of things that could generally be categorized as "nearness to" factors. In other words "how far is it to the nearest........" or how convenient is this location in comparison to other comparable and competing locations. Proximity is relative. For example, maybe the subject property is five miles to the nearest convenience store, which might sound like a long way away to some; however in a rural area like the subject's location it may be typical to be 15 to 20 miles from the nearest convenience store.

Fire Protection

Fire protection is a similar issue. Is there a full-time staff of hired officers with up-to-date equipment and good communication? Or is it a strictly volunteer department that is not particularly well-trained or equipped? Where is the closest fire station? How long would it take a fire truck to get to your property in the event of an emergency? Of course there can be too much of a good thing. If your property is two doors away from the fire station and you hear all the sirens and horns in the middle of the night; that may decrease the value of your property. Where is the closest fire hydrant? Most insurance companies will give you a break on your fire insurance if you are within a certain distance from a fire hydrant. By the way, you might investigate the cost of typical fire insurance in an area. The companies do vary the rates according to perceived risks.

Utility

For an economic good to have value, it must have utility. Utility is defined as "In economics, the ability of a product to satisfy a human want, need, or desire." It has to be good for something - it has to have a purpose. You have to be able to use it. Imagine a piece of land that is almost perpendicular, on a rocky mountainside; or land that is in the middle of an impenetrable swamp; or landlocked land atop a mountain. If nobody can figure out a way to use these land parcels, they have no value. No one wants them - at any price.

Governmental Forces

Here is a list of governmental forces that might affect real property value. This list is not all-inclusive, but covers some of the more important factors. Planning Zoning Building Codes Environmental restrictions Taxes Utilities Transportation Education Cultural Parks and recreation Police Fire protection Public safety

Rental Vacancies

In analyzing a rental market, one of the first measures we look at is the percent of rental vacancies. This is analogous to the unemployment rate, in that lower is better. It is possible for a rental property to be occupied 100% of the time, or 365 days a year for all units. You may find properties like that in a really hot rental market. When you encounter a property like this in a "typical" or "average" market, it generally means that the current rental rates are too low. A well-managed property, running under optimal conditions, typically would generate a small vacancy percentage during a given year. Circumstances will change, and tenants will move. Also, management needs a little downtime to get in and make repairs and upgrades between tenants. A relatively normal and healthy rental vacancy rate might be in the range of 4% to 5%, for a year. The statistics in your local marketplace are harder to track than the unemployment rate. The government is able to keep pretty close track on the unemployment rate because unemployed people apply for benefits. The rental vacancy rates in an area are sometimes published in your local newspaper. Those kinds of statistics usually emanate from real estate brokers, appraisers, or management companies. You can also do your own checking by calling around to those people as well as other market participants, such as investors or building superintendents.

functional utility

In later courses we will address another term, functional utility. This is defined as "The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building's use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms." Appraisers recognize functional utility as an element of value. If one property has more functional utility than another, it has more value. We also measure loss of value by the amount of diminished utility or inutility that we observe. However, functional utility assumes that there is some amount of utility to start with. No utility = no value.

Utilities

In some rural areas, the local government offers no public utilities. In more densely populated areas, it is common to find public water and sewer. The availability of public utilities to a site constitutes another value-influencing factor. If you have a piece of land with no utilities provided, in order to place a dwelling on that property, a well has to be drilled and a septic system installed. This will certainly cost thousands of dollars - sometimes tens of thousands of dollars. In some areas, there is uncertainty as to whether or not adequate systems can be built. If a piece of property can easily be connected to public water and sewer at the street, it should be worth more. Beyond the availability of utilities, another factor is their cost of use. Some utility companies have rates that are much higher compared with companies in other areas. Even if costs are equal, many times there are differences in the quality of the water supply. By the way, don't just assume that because utilities are available nearby that you would have the right to automatically connect to them. In some communities, there are shortages of water because of rapid amounts of construction of new structures, and the availability of new hookups is limited. In some cases moratoriums have been put in place for a year or two to halt new construction until the supplies can be increased by modernizing or constructing new facilities.

Availability of Financing

Interest rates are just one part of the picture when we discuss mortgage financing. We need to also look at the availability of financing. In the late 1970s and early 1980s there was a shortage of mortgage money. Inflation was raging, and interest rates were hitting all-time highs. It was at the point in some areas where the cost of money, from the Fed and other sources, was so high that lenders could not get enough of a return from mortgages. Also, there was a problem in many states with usury laws on the books which prohibited charging interest rates above certain levels. As a result, many lenders just stopped lending for a while and put a moratorium on new loans. People said money was "tight." At certain points in our economy, there have been times in which mortgage money may be plentiful for residential properties but in short supply for commercial lending, or vice versa. The loan to value (LTV) ratio is also an important factor. In times of tight supply, you may have to put 20 or 30% down in order to buy a house. This removes many potential purchasers from the market and decreases the effective demand for properties in an area. For example, if a buyer is required to make a 20% down payment when purchasing a $300,000 house, that means the buyer has to come up with $60,000 in cash for the down payment, plus more cash for the closing costs. Not all potential buyers can come up with that kind of money in cash, so higher down payment requirements reduce the pool of potential buyers. Conversely, when an individual can easily qualify for a loan of 95% or 100% of the property's sale price, it greatly expands the pool of people who can buy a house. These issues were demonstrated during the lending boom of the early 2000s and the resultant crash. During the boom, lenders were so eager to make loans that in many cases they failed to exercise due diligence in underwriting the borrower's capacity to repay. "Stated income", "low-doc" or "no-doc" loans, in which the borrower simply stated how much income he/she made without verification, were common. These types of loans became known as "liar loans" due to the propensity of many borrowers to overstate their income levels. During this time, lenders were also happy to make 90%, 95%, or 100% LTV loans without PMI. These under-collateralized loans were usually the first to go into default, and they resulted in significant losses to lenders when property values began to decline in 2007-2009. After the well-publicized crash that resulted in the demise of many lenders, the lenders that remained in business suddenly developed an aversion to risk. As a result, many otherwise qualified borrowers, particularly those that were self-employed, suddenly found themselves unable to obtain a mortgage loan. Many industry insiders felt that the tightening of underwriting guidelines resulted in a lack of available financing, which exacerbated the decline of real estate prices even further, creating a vicious cycle.

Lifestyle Changes - Home Offices

It is certainly true that there has been a substantial increase in people working at home. The phrase "telecommuting" has become part of our vocabulary. The National Association of Home Builders did a survey a few years back asking what features buyers of new homes wanted. Fifty-eight percent (58%) of respondents replied that they desired a home office. This trend can have manifold influences. With more people working at home, there will be less traffic on highways. This may result in planners reconsidering traffic counts when redesigning the local infrastructure. It also may result in people willing to live further from the main centers of employment. The more remote areas may come into greater demand. It certainly should impact the architectural design of many new homes. It will become more important to have access to the internet. Better room lighting, increased capacity electrical services, and additional electric outlets will be in demand. If people work at home all day long, they will be using more electricity, water, heating and cooling. We are also seeing the emergence of more couples working at home with the need for dual offices. It may be necessary to inquire about subdivision restrictions or CC&Rs that prohibit commercial activities in private residences. Also, some of these developments restrict the number of cars permitted to park on the premises. Another quick check of your understanding is next.

Cup of Air Example of the Four Elements that Create Value

Let's examine something to see if it has value. Let's take this cup. We're not talking about the cup itself; we are referring to its contents. This cup is full of something that may or may not have value. If there were pencils in this cup, they should have value. If it were full of coffee, that ought to have value. Of course we would have to research and analyze all the aspects to make sure that pencils were wanted and that they weren't broken. We would have to make sure the coffee wasn't stone cold, two days old, or too strong for someone's taste. In this example, let's say the cup is simply full of air. Does the air have value? Maybe - let's check it out. Desire. Is there desire? Sure! Everybody wants and needs air. Utility. Does it have utility? You bet. I can easily breathe it in and utilize all that oxygen in my blood stream. Effective purchasing power. Is there effective purchasing power? Not a problem! Just hold your hands out and I'll dump that air right into your palms. It's free! Scarcity. Does it have scarcity? Ah, here's the problem! Air is in plentiful supply. I can empty that cup out and it will automatically fill right up again with free air. Therefore, we can conclude that the air in the cup has no monetary value. It lacks scarcity. To have value, a thing must possess all four characteristics. However, if you were ever in a situation where air was in short supply - such as being under water - you would quickly appreciate its value.

Transportation

Let's start with the basics. What kind of road access is there to a property? Is it a town road, a county highway, or a state highway? Is it a dirt road or a paved road? How far is it to the nearest interstate highway? Is there any public transportation available nearby? Is it bus, rail, or subway? Is the system adequate and are the costs reasonable? Do most people take public transportation to work or do they drive? These questions can affect the desirability and enhance the value of residential properties but again take on a more vital role in commercial or industrial properties. Retail properties need to be near or on well-traveled highways. Ideally they would be near an exit of an interstate or arterial highway. Industrial properties can't survive without adequate transportation links. These operations need to bring in raw materials and ship out the finished product. Depending upon the nature of the product, this could entail transportation by highway, rail, train, or air. Of course they also need a good road network to get their employees back and forth to work.

Lifestyle Changes

Lifestyle changes can also impact the fabric of society and result in changing formations in real estate utility and value. For example, changing thoughts about the desirability of energy conservation and environmental concern have permeated the American psyche. Today we are exposed to the concept of "Green Construction" which is based on using environmentally friendly products and building processes. As a social factor, it feels good. As an economic factor, it should result in reduced energy costs.

Building Codes

Like zoning laws and regulations, building codes can have an impact on values in an area. A strong building code can result in properties that meet health and safety standards. Such properties can be more valuable and also sustain their value over longer periods of time. Building codes and subdivision regulations typically dictate requirements for land development. They may stipulate minimum requirements for road development, water and sewer easements, well and septic systems, footings and foundation specifications, etc.

Man-made Hazards

Man-made hazards can be just as serious, if not more so. In spite of the impressive safety records of nuclear power plants, some people may be reluctant to live near such a plant. The presence of man-made hazards may impact a wide area. Some examples might be: Landfills Chemical plants Superfund sites Toxic waste storage facilities Refineries Some of these situations may result in pollution of the air, water, or ground. Even bad odors may affect areas miles away. Certain areas are prone to smog development many days of the year, which can lead to breathing problems.

Planning

Many communities take planning very seriously. Conversely, some have no planning or zoning ordinance at all. It has generally been proven that planned communities sustain higher real estate values. It takes away some of the uncertainty for residents and gives them peace of mind knowing what can (and cannot) be developed nearby. Zoning is a very specific set of regulations that allows specific uses for a property. Planning is a broader scale activity that is utilized by the community. Planning may occur on a local basis, such as a village, town, or city. Planning may also occur on a countywide or regional basis. Most community planning did not occur until the 1960s and 1970s. It was in the aftermath of, and in some cases a result of, urban or suburban sprawl. It was felt that there should be a general direction expressed and plans laid down for general land usage. These community planners looked at which parts of the community should be residential, which should be retail or commercial, and where any industrial usage should occur. Part of becoming familiar with the market area is to study the master plan for the community, if there is one. This will give you an overall feel for potential future development and the direction of growth.

Natural Hazards

Natural hazards can run the gamut from minor inconveniences to major perils. Some parts of the country are prone to natural hazards. In some cases it is purely random, but other areas have a fairly consistent pattern of recurring dangers. These can include: Hurricanes Tornados Floods Forest fires Earthquakes Volcanic eruptions You might not want to live in an area called "Tornado Alley." The effects of Hurricanes Katrina, Hugo, Irma and Tropical Storm Sandy may be felt for decades. Some areas are particularly prone to certain types of natural disasters, and it may scare some people away.

local employment trends

Obviously, when valuing residential real property, local employment trends are more important than national trends. An area may be doing very well, for example it may boast an unemployment rate of 3%, bucking the national trend. That area is likely to have a healthy housing market. Or conversely, an area may be really struggling, with an unemployment rate of 12% or more. It is likely that this area would have an oversupply of available housing, and declining property values. Is the employment in an area permanent or cyclical? In some areas construction work is very busy in the summer and dries up in the winter months. Some areas have job opportunities primarily in the summer season (at a beach or lake) or in the winter season (a ski resort). You might encounter 5% unemployment in the busy season and 10% at other times of the year. Are some jobs transient? Areas around military bases are subject to fluctuations as thousands of military personnel are shuttled in and out. The service industries nearby may expand and contract accordingly. The workers at the nearby gas stations, pizza parlors and movie theaters may periodically get laid off or hired back. What are the trends in your area? Are layoffs predicted in some of the basic industries? Or are local employers hiring? It is a constant effort to keep informed; read the newspapers, utilize appropriate online sources, talk with people in the know; or drop in at the local chamber of commerce or planning agency. And remember - things could change tomorrow. If unemployment rates are high, it can affect the housing market. People are not going to be buying houses if they are out of work. The market may get flooded with foreclosed houses, and depress prices further. Businesses may suffer as well as a decrease in people's purchasing power.

Police

Police protection is a major concern for local governments as well as local homeowners and businesses. Are there full-time police officers, or is it a rural area with part-time constables? How effective are they? How is the crime rate? What is the reputation of the local police department? Any area with an above average crime rate or perceived problem can lose favor in the minds of the public. Some people may leave and values may diminish if the situation is not corrected. If buyers have a choice among areas, all other things being equal, the safer area will usually win out.

Expense Levels

Previously, we said that net income is a function of income minus expenses. Some of those expenses include: Utilities Taxes Insurance Maintenance Supplies Employees The costs of all these items can vary from region to region and locale to locale. You want to do some research to find out if the costs of energy, for example, are above or below the norm. We already said the cost of taxes and insurance will vary according to local influences. There are national studies available online to which you may subscribe, or publications you may purchase, which track these expenses on a national basis.

Public Safety

Public safety encompasses things like electrical codes and fire codes. We want to make sure that buildings are up-to-date and protected from hazards. Are the codes strictly and fairly enforced? In recent years, public safety has come to encompass other things, such as national security. Since 9/11, many municipalities have undergone extensive training and are well funded and equipped to deal with such eventualities as terrorist attacks. Medical facilities have also prepared disaster plans. Local governments have studied possible evacuation routes, etc. Other municipalities have been lax in this regard, and their shortcomings have been publicized. It may give pause to potential residents or transferees. We also have had experiences with natural disasters in recent years including hurricanes, tornadoes, earthquakes, floods, and droughts in many areas of the country. Some people may think twice about retiring to Florida in light of the recent spate of hurricanes. Some people may be scared off from areas that are particularly prone to earthquakes or tornadoes. Some farmers or ranchers may abandon properties that are no longer profitable for agricultural purposes due to extended drought conditions. Properties in these areas may lose considerable value and may face severe marketability problems. Weather and climate are external forces beyond our control, but they may translate into a real impact on real estate values. People love to live in San Diego because of the moderate climate. The same goes for Hawaii. It's not a coincidence that those two areas have some of the highest residential housing prices in the country. Let's take a break here and check your understanding.

Utilities - Commercial Properties

Public water and sewer are nice conveniences for residential property owners. You will have to pay a periodic charge, but you can be pretty much assured of a constant supply of potable water and adequate disposal of wastes. Wells and septic systems cost more initially, require periodic maintenance, and can be prone to problems. For commercial and industrial properties, utilities are a lifeline. A restaurant consumes thousands of gallons of water a day and produces significant amounts of sewage. If that restaurant is located on a small lot, it may not be able to operate with a well and septic system. If there are no public utilities available, a site might not be adequate to support a restaurant operation; even if it is well located and the zoning would permit such a use. Think of the amount of water and sewage required by something like a school, community center, or hospital. Many industrial operations are heavy users of water. These kinds of operations realistically can only locate where there are adequate supplies of public water and sewer.

Scarcity

Scarcity is defined as "The present or anticipated undersupply of an item relative to the demand for it. Conditions of scarcity contribute to value." Scarcity usually triggers demand. The more scarce an item is, the more valuable it is likely to be. Think of sales or auctions of paintings by Rembrandt or Van Gogh or Stradivarius violins. There are only so many of them and more will never be produced. Many more people want one of those paintings or violins than are available. When one comes on the market, the bidding starts. Apparently this is real demand, as quite a few people are able to afford them. On the other hand, if there is an unlimited supply of some item, like dandelions, they tend not to have much value. Yes, I know, people sell dandelion greens and dandelion wine. But you pay for the processing, not the availability of the raw product. You could go pick your own - unless it is wintertime. If it is wintertime in the north, or you live in a desert, dandelions might be scarce. Then they may have some value. Let's try to relate scarcity to real estate, not dandelions. Real estate fetches premium prices when it is scarce. If you have 50 people wanting (and able) to buy a new house in the county and there are only five available, what will happen? Want to bet the asking prices will get bid up? Of course, it can go the other way. Imagine you are in a part of the country where condos were significantly overbuilt. What if there were thousands of newly built condos for sale and few buyers in sight? They could go into foreclosure if they could not be sold. The opposite of scarcity is an oversupply. It can strongly depress values, or lead to no sales at all - at any price.

Consumer Price Index

The Consumer Price Index is just one measure of price pressures or inflation. But it does track the cost-of-living in various areas around the country. The Fed, at its quarterly meetings, always takes a hard look at inflation figures. Sometimes it will raise interest rates slightly as part of its continuing battle to keep inflation in check. It's a delicate balancing act, because they typically want to keep interest rates low so that mortgage borrowing is affordable. People are concerned with the cost of living. It certainly is a factor when people are relocating. Over the next 10 years, Baby Boomers will be retiring in record numbers. Many will retire or semi-retire to a different area from where they currently reside. You can find many publications that talk about the best places to retire. If you read one of these books, magazines, or websites, you will find they rate locations according to many of the same factors that we are discussing here. They will discuss and rank properties according to a large number of factors, including climate, crime rates and cost of living. Click here to log on a site provided by the National Association of REALTORS. It will allow you to directly compare the cost of living and average salaries for specific job titles in various cities.

Ages

The age of an area's residents can have an impact on the market. It also can impact the type of housing and housing values. If an area tends to attract young families with children, then you may see a preponderance of larger houses with more bedrooms. The school systems will tend to have more population and perhaps need to expand. This may result in higher tax rates. Younger families tend to have lower income levels and, therefore, create a need for less expensive housing. Not all of these people will be able to buy, which may result in more demand for apartments. Many young people are staying unmarried for longer periods and this may create a demand for smaller housing units or condominiums with low maintenance costs. If the majority of the residents are middle-aged, they may be near their peak earning years. Many may be empty nesters. This will create a demand for more expensive and amenity-oriented properties. Some areas are destinations for retirees and these people have their own needs and desires in housing. There may be a greater demand for one-level living and community associations where maintenance is provided and where there are recreational opportunities.

Parks and Recreation

The availability of parks and recreational facilities can be dependent upon any or all levels of government. Perhaps there is a national park or national recreation area nearby. Maybe there is a state park with camping, swimming and hiking. There might also be a county, town, village, or city park and recreation area. These may include play areas for children and facilities for specific activities such as golf, soccer, fishing, or cross-country skiing. Even though these areas are not on a property or within the property's view, they can provide a beneficial aspect to a property. Being five minutes away from a state park or a municipal golf course can be an added inducement to homebuyers. It may also provide an additional reason for a business to settle nearby. Obviously, there would be a demand for a ski shop near a ski slope or a boat dealership or a bait and tackle shop near a large lake.

Soil Conditions

The basic underlying soil conditions are also a consideration and may dictate development patterns as well. If the land is very rocky, it will be hard to build on and require blasting or hammering to excavate for footings or foundations. Drainage may be poor, and the site may require above-ground "mound" type septic systems. Sandy soil will generally drain well but does not have the structural strength of normal soil. Additional footings or structural support may be required. The soil may be a slow-draining type, such as clay, which again will require additional development costs and drainage systems. Soil may be wet with a high water table. It may be swampy, or marshy. This may also preclude any type of extensive development without great expense for draining or dredging the land. This may not even be possible if there are protected wetlands. Even the presence of a swampy area nearby may be a hindrance due to insect problems. If the soil is fertile, with adequate drainage, it may result in most of the land being utilized for agricultural purposes. In that case, the land may have greater value for farming than for development.

Climate

The general climate can have an impact on activities or developments in various areas. The climate in Miami Beach is conducive to year-round, water-related activities. It has become a haven for vacationers and retirees. The same goes for Honolulu. The climate in Minnesota and Wisconsin results in summer activities around the lakes and snowmobiling and ice fishing in the winter. The moderate climates and long growing seasons have encouraged agricultural activities in such areas as central California and parts of the South. The climate and elevation of places such as Aspen and Sun Valley naturally led to the development of ski areas and winter activity centers.

Topography

The general topography of an area may dictate development patterns or even preclude development in areas of severe slopes. If the topography of an area is generally open and level or moderately sloping, it opens up the possibilities for various kinds of development; either residential, commercial, industrial, agricultural, or recreational. Hillside areas may prove desirable, gaining privacy and views. On the other hand, sloping land presents more construction problems and additional costs for leveling, terracing etc. It may be prohibitive to develop such land for commercial purposes. It really is a matter of degree, pun intended. A little bit of slope may be nice but if it is too steep, it may limit land use to little more than growing trees or as a nature preserve.

Nature of Improvements in the Area

This is a broad category, but we need to look at the big picture and analyze the nature of existing development in the area. Is the area developed to any extent, or is it primarily vacant land? Is the vacant land being utilized for any purpose such as farming, ranching, forestry, etc.? Has the area been developed primarily with residential structures? Are they old or new? Are they well-maintained? How expensive are they? Are they consistent in style and size or is there no pattern? Is there new construction going on now? Is the new construction consistent with existing construction? Is the area urban, suburban, or rural? Are there commercial and retail properties nearby? Are there industrial properties nearby?

Population Migrations

The population charts will give you the hard facts about immigration and emigration for various locales. That enables us to make some mathematical projections. However, what is more important is knowing your market area and analyzing why people are coming or leaving in such proportions. Which are the fastest-growing areas and why? Where are people going? We have heard for years how people are fleeing the Northeast and the "Rust Belt" states of the upper Midwest. For many years, people retired to the South, particularly Florida. The West and the Southwest had been desired destinations for new jobs or retirement. In recent years, we have heard of many people leaving California and moving to Colorado, Utah and Nevada where there is less pollution and housing is cheaper. Is that true? Do figures back that up?

Smaller Households

The reasons for smaller households include: Young adults waiting longer to get married (now 26.1 years for women and 28.2 years for men) More adults never marrying More divorces More single mothers More older women outliving their husbands More unmarried men and women living together More same sex partners living together Declining birth rate

National Economy

The state of the national economy can have an impact on local real property values. Are we in a recession or a boom time? We talked earlier about real property cycles and how the economy tends to move up and down in relatively similar historical patterns. Is the economy expanding? Is the stock market going up? Are people generally optimistic? All these factors tend to inspire confidence and spur spending in the economy. What's happening with the national debt? What is the state of the U.S. dollar versus the rest of the world currency? What's the cost of a barrel of oil? All these kinds of factors are remote from the local situation and yet ultimately they can trickle down and affect the value of local real estate. If the price of gasoline gets too high, there may be a slow down on new subdivisions that are being planned a long commute away from employment opportunities. It also may hurt the second home market, where people may no longer want that two or three hour drive to their vacation getaway.

Population Trends

The study of population trends comes right down to the supply and demand again. If people are moving into an area, it will create a demand for housing and services. If people are leaving an area, they will leave behind an oversupply of houses and a diminished need for services. The prime source for population demographics is the U.S. Bureau of the Census. The formal census is only taken every 10 years, but the Bureau does an annual update for the in-between years. This information is usually available on a regional or local basis, as well, through various planning agencies and chambers of commerce. You might just as well go to the horse's mouth. Most of the local information is derived from studies of the Census Bureau. Click here to go to the Census Bureau website. One of the most interesting categories on the homepage is headed "People & Households" (which is located at the very bottom center of page). I would recommend clicking on the links to "Population Estimates" and "Population Projections." You could easily spend a week or two wandering through all that data. You also might want to notice the population clock in the upper right corner that keeps a running total of the population for the U.S. and the rest of the world. To the right of that is a box labeled "Quick Facts." Put in your state, city or municipality to get some quick figures.

Social Influences

The third major category of influences on property values is social. This is the shortest list, but that does not mean these influences are not important. These may include: Population trends Population migrations Ages Family formations Lifestyle changes

Interest Rates

The topic of interest rates is rather complex because of the interlocking effects on so many aspects of our economy. Let's start with the obvious. We mentioned that most homeowners need to take out a mortgage in order to buy a home. If interest rates are low, it encourages mortgage borrowing. However, if the interest rates go up, it forces some people out of the market and slows the effective demand for home purchases. Part of that "slowing" effect is a voluntary reaction where people say things like, "Wow, I'm not going to pay over 6% for a mortgage. That's just too high!" But there is more to that than a simple perception or knee-jerk reaction. Some buyers will not be able to afford to buy a house because their monthly payments, at the new interest rate, will be too high. When qualifying for a loan, the lending community imposes certain ratios. For example, it is common for lenders to restrict mortgage loans so that the total expenses for your mortgage, including principal, interest, taxes, and insurance do not exceed about 30% of your gross income. If interest rates go up, payments go up. A buyer who is stretched to his or her limits on the monthly payment will not be able to afford as much house if interest rates go up. The cost of borrowing money can certainly curtail business investments as well. In periods of low interest rates, many companies and corporations will spend to expand their facilities. But if interest rates are high, it stimulates parts of the economy other than housing. Saving is encouraged when people can put money into a money market fund and get a return of 3%, or buy a CD and get 4%. Currently in the United States, interest rates on savings are very low, and this tends to discourage traditional saving.

Cost of Construction

The total cost of construction in an area, be it residential or commercial construction, is really an amalgam of three factors: Land costs Materials costs Labor costs In some areas of the country, land has become exceedingly expensive. It can put the brakes on new construction, particularly for affordable housing. Materials costs typically do not vary that much from area to area, as they are usually mass produced by various manufacturers. Sheets of plywood or bundles of roofing shingles generally cost roughly the same amounts to manufacture. The difference in costs at local levels is primarily attributable to transportation costs. Alaska has high prices for material costs because almost everything has to be shipped in. You may encounter higher prices for heavy items, such as brick or stone, if they have to be shipped considerable distances. Sometimes local lumber or proximity to a concrete block plant may result in lower prices than the norm. Labor costs can vary considerably from one area to another. They can certainly make a difference in the total cost of construction. In some areas carpenters may be scarce and expensive. In other areas there may be a surplus of masons. However, many of the trades move around and follow the work. Unionized workers may demand and get higher wages.

Business Taxes

The total tax burden, including state and local taxes, has an impact on business development as well. When companies or corporations are deciding where they may wish to relocate or expand, the tax situations do come into play. These companies will compare the tax burdens in various areas and factor that into the final decision-making process. They factor not only business taxes but also consider the tax rate that their employees will have to shoulder. It's all part of the total cost of living in an area. You've heard occasionally about economic development councils that are engaged in trying to lure new businesses to their area. One of the major tools at their disposal is the ability to offer tax breaks for new businesses. Perhaps, a new employer may be offered reduced property taxes for the first 5- to 10-year period. In some cases, there might be a total tax amnesty for a period of time.

U.S. Army Corps of Engineers

Their mission is planning, designing, building and operating water resources and other civil works projects including: Navigation Flood control Environmental protection Disaster response Ecosystem restoration Wetlands and waterways regulation & permitting They keep the canals running and dredge the rivers. They occasionally make the news, especially after a major hurricane or flood or other natural disaster. They also must be consulted when damming up a stream on private lands or dredging any wetland areas.

Unemployment Rates

Unemployment rates are another general measure of the health of the economy. In the United States, an optimal unemployment rate is around 3% to 4%; this would represent "full employment". (Some economists disagree, stating that the full employment number is closer to 5%.) It is almost impossible to get it any better than that due to issues of frictional unemployment (people voluntarily changing jobs). In the last few years some areas have been able to sustain an unemployment rate around 6%. In other areas, you may find 10%, 12% or more. Those would generally be unhealthy numbers. As of this writing, in early 2018, the latest figures indicate the national unemployment rate is approximately 4.1%. Even in the short term, the national unemployment rate varies quite a bit. Here is a chart showing the years 1998-2017. It went from 4.5% down to 4% and back up to 6% again in 2003. Then it took a big jump in the recession years of 2009-2010.

Wage Rates

Wage rates in an area are another item of interest. It can't be much more basic than that. The more you make, the more you can afford. You'll find a direct correlation between average family earnings in an area and housing prices. A lot of it is related to the multiplier effect I mentioned earlier. If I can afford a mortgage payment up to 30% of my annual income, this means the more I make, the more I can borrow, and therefore the more I can afford to pay for a house. According to the National Association of REALTORS®, the median sales price for the fourth quarter of 2017 for existing housing was: Toledo, OH $115,100 Amarillo, TX $153,900 Charleston, SC $272,700 Hartford, CT $223,800 Decatur, IL $100,000 White Plains, NY $372,900 San Jose, CA $1,270,000 Honolulu, HI $760,600 I have to believe there are differences in wage levels in these places! I won't go into all the details, but you can click here to see average wages for any metropolitan area, region, or state at this website.

Education

We consider all levels of education being offered by government. Perhaps there are state universities nearby, or community colleges run by the county. There may be local or regional occupational training centers, as well. What about the local public school systems? Is there an elementary school nearby? How far is it to the high school? What is the quality of the local system? Is the school noted for academic excellence? What about the number of students and the student-to-teacher ratio? Is there overcrowding or planned expansion? The availability and quality of education in an area usually are significant factors in valuation.

The Big Picture

We have spent this whole chapter talking about various things that may influence value. They don't all come into play every time, with all properties. When you are appraising a particular property, you need to consider which particular factors are relevant or important in this instance. Maybe the economic factors are normal except for a slight oversupply which is evidenced by lengthening marketing times. However, there is a serious concern in the neighborhood because the city has just announced they will be building a new transfer station for the municipal landfill about a quarter of a mile away. You have to sit back, put your feet up on the desk and think about the subject property in detail. Ask yourself: what are the two or three most important things affecting it? What are the positive factors? What are the negative factors? Do they balance out? What is the net effect - is the property worth more or less because of where it is situated? It may be helpful to make a mental checklist by thinking about the four categories we detailed. What are the important governmental, economic, social, and environmental influences affecting the value of this property? It may be helpful to even list them on paper.

External Market Forces

When trying to get a handle on these forces, imagine that a house is like a television set. A house, like a TV, has physical dimensions. You can measure its length and width to calculate its area. You can peer into its innards and check out its wiring. Does it have solid state circuitry or is it full of old-fashioned tubes? Does it have HD TV capabilities, does it have Internet connectivity, or does it have a plain old glass picture screen with rounded corners? You can check the outside for scratches and marks. Does it appear to be in good condition?

You may visit them at www.epa.gov

You may visit them at www.epa.gov. It is a huge website. Why not go poke around a little? I think you will find things of particular interest if you click on some of the tabs on the left side: First click on "Where you live." This will enable you to put in your ZIP Code and find applicable local and state regulations. Scroll down, and you can click to check valuable information concerning: Envirofacts - environmental activities anywhere in the country Toxic release inventory AIRNOW - information on air pollution National Superfund sites Enforcement and compliance history in your community Environmental regional offices You may also want to explore some of the following links on the left side: Laws, regulations, and dockets Frequent questions Information sources Educational resources

Baby Boomers

You no doubt are aware of the influence of the Baby Boomers. That generation has been described as a bulge moving through the system, as a result of a large number of babies born after the veterans returned from the Second World War. They have had a large influence on the economy and many are now reaching retirement age. How will this affect real estate values and the types of houses that are being built? In 2001, the first wave of baby boomers turned 55, which was significant because according to the Fair Housing Law, at age 55, a buyer is eligible to live in a legally "age-restricted" community. The home building industry is feeling the impact of this demographic surge and seeing a growing demand for active adult housing which meets the needs, demands, and lifestyle of this unique generation. The nation first became aware of the baby boomers as a group with an impact in the late 1960s, and they have been making their impression on the American culture, economy, and lifestyle ever since. They are wealthy, controlling about 70% of the nation's wealth and 50% of all discretionary income. In 2011, the oldest members of the Baby Boom generation began to turn 65 years of age. Beginning on January 1, 2011, approximately 10,000 baby boomers will reach age 65 every day for the next 19 years. In 2010, only 13% of Americans were age 65 or older. By 2030, 18% of the nation will be at least 65 years of age.