RE Econ Exam 2
Endogenous flows
Money remains within the region
The main reason for the development of NAICS, which would replace SIC, is: - The explosion of new businesses after 9/11. - Growth in the tech industry. - The concentration of industries throughout the U.S. - The signing of the North American Free Trade Agreement (NAFTA) in 1994. - The addition of the internet.
The signing of the North American Free Trade Agreement (NAFTA) in 1994.
One important use for NAICS is the study of the concentration, and growth trends, of industry jobs in Metropolitan Statistical Areas (MSAs). True False
True
Real property in 3 dimensions
Can be owned by different interests - Mining rights - Flight paths - Easements, lease
Location Quotient
Can be thought of as a measure of industrial specialization
Natural rights doctrine
Certain individual rights may not be taken away by the government
Policies that Help Neighborhoods
Challenging to determine best policies - neighborhoods are complex systems 1. Improving schools 2. Infrastructure investment 3. Policing ramp-up 4. Housing renovations and/or environmental clean-up 5. Tax incentives for business location and economic development
Gentrification
"Gentrification is a process of changing the character of a neighborhood through the influx of more affluent residents and businesses."
Contract of Sale
"most important document in real estate" describes the sale in detail
Export jobs =
(1 - 1/LQ)
Proportion of industry employment that is basic is:
(LQ-1)/LQ
Personal Property
- Property that is movable and not fixed or permanently attached to real property - Exceptions - having to do with design and "fit"
Building codes under the police power of local government
- Protect the health, safety, and welfare of the public - However, sometimes force additional costs, higher prices, and lower affordability - Housing subsidies are designed to patch the gap
Which of the following are considered Real Property? - A stained-glass picture which is hanging in a window which is custom-sized to fit the artwork. - Christmas lights hung in the trees around the home. - A cabinet made from mahogany which looks good in the home. - A warehouse building. - An antique light fixture installed above the kitchen sink. - A playhouse built in the backyard of the home.
- A stained-glass picture which is hanging in a window which is custom-sized to fit the artwork. - A warehouse building. - An antique light fixture installed above the kitchen sink. - A playhouse built in the backyard of the home.
Costs of Restricting Land-Use
- Affordability - Exclusive communities, limits diversity - Inefficient -> lots of transaction/admin costs to regulate land-use
Cost approach
- Construction cost estimate minus depreciation - Add in estimate of land value
Federal tax law in US permits
- Deduction of mortgage interest and property taxes - Capital gain not taxed (up to 250K for individual and 500K for married couple) - Tax advantages of home ownership
Income Increases when:
- Demand for housing increases (leads to flatter bid-rent function) - Aversion to commuting time increases (leads to steeper bid-rent function)
Important Deed of Trust Clauses
- Description (debt and property) - Insurance clause (casualty) - Escrow clause (prop taxes; insurance) - Preservation and maintenance clause failure to keep up the property (can result in default) - Right of foreclosure (upon default) - Acceleration clause (upon default) - Due-on-sale clause (acceleration upon transfer)
Income Approach
- Estimate income in a pro forma - Estimate sales price at end of holding period - Discount cash slow at opportunity cost rate to estimate value today
Basic goods and services can be described in the following ways (mark all that apply): - Exports - Imports - LQ > 1 - Industries producing quantities exceeding local consumption - LQ < 1 - The service sector - Money flows within a particular region
- Exports - LQ > 1 - Industries producing quantities exceeding local consumption
Filtering Model of the Housing Market
- Fixed number of households, various income groups - Cheaper to build new housing than to upgrade existing housing - Housing deteriorates over time - Demand for housing increases over time - Implication: housing built primarily for higher income groups, filters down to lower income groups, lowest quality units demolished
Which of the following statements regarding the Home Ownership and Equity Protection Act (HOEPA) are true? HOEPA requires borrowers to provide additional disclosures below a defined credit level. HOEPA targets abuses in subprime lending. HOEPA requires borrowers to provide proof of minimum balance sheet levels. HOEPA requires banks to be scored based on specific criteria reflecting societal benefits. HOEPA prohibits extending credit without regard to a consumer's repayment ability. HOEPA specifies additional restrictions on loan characteristics when APR exceeds a certain level.
- HOEPA targets abuses in subprime lending. - HOEPA prohibits extending credit without regard to a consumer's repayment ability. - HOEPA specifies additional restrictions on loan characteristics when APR exceeds a certain level.
Which of the following statements are true when a residential land user moves from the CBD to the suburbs? - Housing consumption rises with the distance from the CBD. - Residential users frequently fail to include the cost of commuting when comparing alternatives along their bid-rent curve. - Other goods consumption decreases with the distance from the CBD. - Moving to the suburbs typically forces residential users to spend outside their budget on their new lifestyle, causing foreclosures and bankruptcy. - One of the main problems with the bid-rent function is that it fails to be flexible enough to describe the effect on bid-rent of higher scoring schools. - Residential land users often make bad decisions by over-inflating their commuting costs.
- Housing consumption rises with the distance from the CBD. - Residential users frequently fail to include the cost of commuting when comparing alternatives along their bid-rent curve. - Other goods consumption decreases with the distance from the CBD.
Exogenous flows
- Imports - money flows out - Exports - money flows in
Benefits of gentrification
- Increase in property values for owners (can only benefit when selling) - Improved neighborhood amenities (e.g. reduced crime, better schools, streets, parks) - More private investment in neighborhood (e.g. homes renovated, new businesses)
Costs of gentrification
- Increase in rent for renters - Increase in cost of goods and services - Loss of historic or cultural heritage - Increase in property taxes for existing owners
Which of the following are ways to increase regional wealth (mark all that apply)? - Increase local investment in basic industry - Increase imports - Increase exports - Decrease imports - Seek subsidies from external government (e.g. federal, state) - Buy local - Decrease exports
- Increase local investment in basic industry - Increase exports - Decrease imports - Seek subsidies from external government (e.g. federal, state) - Buy local
Hierarchical system of cities
- Larger cities have industries with large scale economies - Larger cities have more diverse employment bases - Pattern of trade - smaller cities are more likely to buy products from large cities and vice-versa - Small number of large cities because few are needed to provide goods with largest scale economies
Benefits of Restricting Land-Use
- Maintain character of community/limit overcrowding - Amenities in a community can become congested - summers at Chataqua - Increased home values of existing residents -> vocal, active voters benefit
Nature of Property
- Natural rights doctrine - Creation of law doctrine
Housing as a "merit" good.
- Other examples include health, recreation, and education - Defined as benefits which are more important to the individual and society than allowed for by individual choices
Locational Equilibrium
- People must receive the same utility at all locations, i.e. people are indifferent between all x - MUST have higher housing prices near CBD in equilibrium - Higher housing prices work with commuting cost to keep people on the SAME indifference curve (W-tx is income NET of commuting cost)
Housing prices have been found to depend upon numerous neighborhood characteristics: Some are:
- Quality of local school (positive effect) - Crime rate (negative effect) - Property tax rate (negative effect) - Neighborhood income, house size, etc. - Pollution, noise, traffic - Distance to employment, shopping, airport - Access to transit, highway interchange - Proximity to hog farm (negative effect) - Proximity to foreclosed properties (negative effect)
Residential Construction
- Residential construction is driven by fundamental demand factors. - Except that during the 2000 decade the housing price bubble led to very high levels of housing starts, that ultimately caused the prices to collapse.
Real Property Rights
- Right to own both the land and improvements - Right of exclusive possession and control - Right to transfer ownership as one sees fit (right of disposition) - Right of quiet enjoyment
Federal, State, and Municipal (Sources of RE law)
- State constitutions and statutes - creation and , in some cases, governance of state agencies (many housing authorities are quasi-governmental) - Uniform commercial code (UCC) covers commercial transactions, including real property fixtures - State administrative regulations
Home Ownership and Equity Protection Act (HOEPA)
- Targeted at abuses in subprime lending - Subprime: Loan to a borrower not qualifying for standard "prime" financing Level of APR triggers certain requirements - Disclosure of fees - Prepayment fee for only 3 years - No balloon pmt for 5 years - No negative amortization - No pattern of lending to households with inadequate income
Limitations
- Taxation - Police power (zoning, building codes) - Eminent domain
Idea of Economic Base
- The sources of the region's income - The engine that drives all real estate activity
Weaknesses of Urban Hierarchy Theory
- Theory does OK for towns and cities that supply market-oriented goods Theory does not account for: - Resource-based industries - Real features of the transportation system - Localization economies, in which firms in same industry are attracted to each other
What is public use?
- Traditional public uses such as public schools, highways, parks, etc, - Use for common carriers, such as railroads and telephone companies, that are available to the public - Elimination of blight, where there are significant negative externalities in land use and important social costs that affect the residents - Pursuit of other clear public purposes, such as a reduction in the concentration of land ownership in a few hands - Economic development projects that produce new jobs and modernize the economy, but do not necessarily involve the elimination of blight
Comparables (comps) approach to appraisal
- Use sales of comparable properties - Adjust prices of "comps" to make them as similar to the subject property as possible
Which of the following characteristics have a positive effect on home value? - proximity to a hog farm - a good grocery store within walking distance - location within walking distance to a train which carries residence to the center of the city - location on a truck route - good quality schools - proximity to a nuclear power plant
- a good grocery store within walking distance - location within walking distance to a train which carries residence to the center of the city - good quality schools
Total employment within a region can be described as: - exogenous money flows directed to workers - only employment in non-basic goods and services - employment in basic industries plus employment in non-basic industries. - employment in industries heavily involved in exports - endogenous money flows directed to workers
- employment in basic industries plus employment in non-basic industries.
Which of the following are downsides of gentrification within a neighborhood? - loss of cultural and historic neighborhood features - increased cost of goods and services within the neighborhood - increased property values for existing residents - improved neighborhood amenities, such as improved schools - increase in rent within the area - increased investment in the neighborhood (renovations, etc.)
- loss of cultural and historic neighborhood features - increased cost of goods and services within the neighborhood - increase in rent within the area
An analysis of a region's economic base includes identification of the industries in the export industry sectors. This can be estimated by first calculating: - the percentage of import sectors within the region - the aggregate discounted cash flow for all real estate within the region - the location quotient for each regional industry sector - the average cap rate within the region - the percentage of endogenous industry sectors within the region
- the location quotient for each regional industry sector
Which of the following statements is true regarding the Monocentric City Model (MCM)? - the rings of the model vary by maximum achievable rent to be paid by users of the land with specific purposes. - The model was first described by William Alonso in 1964. - Different land users will have different demand levels in each city ring. - Retail and commercial will bid higher for rent in the outer rings than any other land user. - The largest use of the center ring is by factories. - It is based on the proven theory that users of land will pay more in rent for locations closer to the central business district (CBD).
- the rings of the model vary by maximum achievable rent to be paid by users of the land with specific purposes. - The model was first described by William Alonso in 1964. - Different land users will have different demand levels in each city ring. - It is based on the proven theory that users of land will pay more in rent for locations closer to the central business district (CBD).
Cities are meant to use land-use restrictions to guide development and accomplish several goals. Which of the following is one example? - to attract new business to the central business district by demonstrating a lack of affordable housing - to increase the amount of development by condemning "inconvenient" property - to maintain the character of a community - to exclude affordable housing development from high-priced areas - to drive prices within a city to a point where residential development is pushed to suburbs
- to maintain the character of a community
Which of the following is one reason public housing did not succeed to the extent expected by the federal government? - while well-intentioned, maintenance of projects declined due to insufficient ongoing budgeting - residents were able to find better, more affordable options - amenities offered by the sponsors were mismatched to their target markets - residents were not allowed to use housing vouchers - the population of potential renters declined
- while well-intentioned, maintenance of projects declined due to insufficient ongoing budgeting
The LQ for the Detroit MSA for July of 2022 in Leisure and Hospitality is equal to:
.85
The proportion of a particular industry's employment within a region that is basic can be estimated using which of the following formulas? - 1 - 1/LQ - maximum LQ within the region - 1 + 1/LQ - average LQ within the region - 1/LQ
1 - 1/LQ
The policies promote home ownership
1. Federal mortgage insurance - FHA program created the long-term, low down payment mortgage loan (97% LTV) 2. Tax deductions - Mortgage interest - Property taxes 3. Effective elimination of capital gains tax on the private residence
Forecasting using LQ
1. Identify industries in the export base 2. Use LQs to determine where and in what industry we expect employment growth to occur
According to export base theory, 2-step process to forecast metro growth:
1. Identify which are the export base industries in the local region 2. Forecast employment growth in those industries
Factors making supply more inelastic
1. Less developable land -> increase cost of existing land (good land for dev. already done, so marginal land left -> more cost) 2. Increased regulation of developable land (lower densities, higher permitting costs of development (fees, time costs)
Supply Subsidy for High-Quality Homes
1. More high-quality homes, lower price 2. Increase in supply of high-quality homes leads some medium-quality homeowners to move up the high-quality market, lowers demand for medium quality homes. Some homes filter from high to medium market. Lower demand and higher supply in medium market leads to fewer homes but lower price in medium-quality market. 3. Similar to (2) for low-quality market. Some of he lowest quality housing is demolished.
Real estate laws are designed to:
1. Protect assets - Defined ownership rights and responsibilities - Zoning restrictions 2. Protect freedom and access - Anti-discrimination laws 3. Encourage behaviors which help the economy - Tax on development - Tax deductions for mortgage interest 4. Prevent "bad actors" from exploiting loopholes - Building codes: safety - Disclosures
Local Programs to Address Affordable Housing
1. Rent Control - government sets specific amounts for rent by unit type and regulated its growth over time 2. Inclusionary Zoning (IZ) - an affordable housing tool that links the production of affordable housing to the production of market-rate housing 3. Housing Trust Fund - typically a state fund that is specifically targets subsidies to develop affordable housing unit developments
Proportion of industry employment that is non-basis:
1/LQ
Constitution of the US (sources of RE Law)
5th amendment - the federal government cannot deprive any person of property without due process (exception: eminent domain) 14th amendment - equal protection clause, due process law
If the LQ for an industry within a region is 20, the estimated proportion of industry employment which is basic is: 10% 90% 5% 95%
95%
Housing in urban areas presents a special challenge primarily due to: - a scarcity of developable land which causes increased prices - tech firms contribute to housing costs for their employees - the supply of affordable housing is generally maxed out in central business districts - low permitting costs within the central business district - lax regulation of development
A scarcity of developable land which causes increased prices
Economic base is comprised of:
Basic goods and services - Exports - when sold, bring money into the region - quantities exceed what is needed for local consumption Non-basic goods and services - Money flows within the region - quantities equal to or less than what is needed for local consumption - aka service sector
How to increase regional wealth
Consumption = Exports - Imports +/- Other - Increase exports - Decrease imports (industry and household) - Increase savings (local investment) - Other (seek subsidies and investment from Govern.)
Total employment
E = Basic + Non-Basic = 100%
Export Base Theory
Economic growth of the city or region is dependent entirely on growth in the export ("basic") sector of the local economy (because the non-export (service) sector exists only to serve (directly or indirectly) the export sector
The discussion of economic base focuses on the sources of a regions income, derived mainly from: consumption imports sales within the region exports
Exports
House of Muth
Housing collapsed to unidimensional service provided by stocks of land and capital embodied in real estate Price of housing is expenditure needed to purchase one standardized unit of service Housing produced as Q = f(K,L) Muth's model is used as basis for studies of population density patterns and conventional studies of income and price elasticity of housing demand
House of Lancaster/Rosen - hedonic approach
Housing is multidimensional product. Households value the many features of a house. We value a house by running a regression such as: V = a +b(sq. ft.) + c(lot size) + d(distance to CBD) Most studies use lev as dependent variable, so coefficients are percentage effects
Which of the following best describes the bid-rent function? - It uses complex formulas which paint a comprehensive and accurate model of location-based rent. - It has never been widely used in discussions regarding city development planning. It can be used to find the location quotient of an industry within a MSA. - It helps predict a possible recession in any country. - It can be used to calculate the effect of a natural disaster on a city's economy. - It describes the level of achievable rent for locations in a city as a function of their distance from the central business district (CBD).
It describes the level of achievable rent for locations in a city as a function of their distance from the central business district (CBD).
Vouchers and Rent Certificates
Most common program in suburban areas Benefits: - Less expensive than housing built by public sector - Can be provided to more households because of lower cost - Demand-side subsidies give households more freedom to choose their own housing and location Problems- May raise cost of housing- Less permanent than public housing - can disappear- May not lead low-income households to live in higher-quality homes
LQ < 1
Not self sufficient, non-basic goods and services
Creation of Law Doctrine
Property rights that are created by government action
Does gentrification contribute to the problem of housing affordability?
Study of Boston [Vigdor (2002)] fails to find any direct connection, although low-income renters in Boston experienced increasing affordability problem - as they did in most other urban areas.
Comparison of owning versus renting example
Real economic cost of house per year: C = tV +rV +dV t = prop. tax rate r = interest rate d = utilities, maintenance, depreciation Cost for homeowner: C0 = (1-T)*(t+r)*V +dV (t=tax rate) Difference as % of house value is (C-C0)/V = (t+r)*T - savings from tax treatment
Bid-Rent Function
Shows the maximum amount that will be paid for a unit of land at a given location Rent = price*output - input costs - transportation costs
Methods for Measuring Econ Functions
Simple geographic theory of an urban hierarchy - market-oriented goods and services - economies of scale and economic suctions in urban areas of various sizes Empirical investigation of economic suctions of urban areas - measurement
Place Based Policies
Tax Incentives - Job creation and business investment tax incentive programs - Enterprise and Empowerment Zones, most benefits fall to landowners - Most investment is not neighborhood or property investment Amenities - Leverage existing amenities - climate, access to trained labor pool, universities Fortune - CEO preference, natural resources, transportation
Which of the following is an effective policy response to industrial pollution? - Large donations from firms to area hospitals to handle the health problems associated with their pollutants. - Setting aside an outer ring of the city for legal polluting. - Incentives paid by the city to firms which agree to move to other cities. - Taxing of firms in an amount equal to or greater than the marginal cost of pollution.
Taxing of firms in an amount equal to or greater than the marginal cost of pollution.
Which of the following was the eventual cause of the Financial Crisis of the 1980s? Homebuyers began refinancing and the S&Ls lost a large portion of their clients. Investors searched for yield, ignoring credit concerns. The housing environment at the time created a huge oversupply of housing, causing price deflation. Stricter laws became difficult to navigate and somet conflicted with others. The S&Ls had fixed-rate assets and variable-rate debt.
The S&Ls had fixed-rate assets and variable-rate debt.
Which of the following approaches describes housing value as a multidimensional regression analysis? the MBS Model the House of Lancaster/Rosen the Affordable Housing Model the Monocentric City Model the House of Muth
the House of Lancaster/Rosen
Exogenous flows are: - all flows of money into and out of the region - identical to basic industries. - all flows of money within the region - equal to endogenous flows plus exports
all flows of money into and out of the region
Deed of Trust
creates the security interest in real property legal title is transferred to a trustee. The trustee holds the deed as security for the mortgage loan between the borrower and the lender
Mortgage note
describes the parameters of the loan
As income increases, demand for housing _______________, and the aversion to commuting time ______________.
increases; increases
Which of the following statements is true regarding local affordable housing programs? - they have never been successful - long-term success of local programs is dependent on low poverty statistics - local governments can implement locally-priced subsidy programs such as rent control because rental markets are local - the subsidy structures implemented in local areas have proven to be ineffective
local governments can implement locally-priced subsidy programs such as rent control because rental markets are local
A "merit" good can best be described as __________________________. - one which is gifted to employees in lieu of a salary increase. - a way to incentivize a buyer to purchase one house over another based on their behaviors. - one which is considered to be more important to the individual and society than the budget for the individual will allow. - a specific type of asset which is beneficial to the buyer but does not raise the price.
one which is considered to be more important to the individual and society than the budget for the individual will allow.
NAICS is a system for categorizing industries:
only the USA, Canada, and Mexico
Real Property
physical property such as land and buildings The earth and all that is attached to it
Listing Contract
places the property "up for sale" - on the market - Listing price, based on valuation: comparable, income, and cost methods
The Listing Contract __________________________.
places the property on the market.
LQ > 1
producing for export, specialists in this industry
The Financial Crisis of the 1980s
• Recession from July 1981 to November 1982 • Savings and Loan (S&L) crisis of 1980s caused by interest rate risk - interest rates on debt jumped up in the late 1970s and early 1980s, but S&Ls had fixed rate loans as assets. • One third of S&Ls went out of business in late 1980s. • Main issues: • Adjustable-rate loans were permitted. • S&Ls were permitted to expand into other lines of business. • S&Ls took on too much risk in an effort to dig themselves out of their financial hole. • FSLIC went out of business, deposit insurance taken over by FDIC.
One simple model of building permits:
ΔK/K = b(V - Vn) + cG; change in housing stock a function of actual vacancy rate minus "natural" vacancy rate and an index of demand growth G. B/K = r - bVn + bV + cG; building permit rate includes replacement unit rate r.
Financial Crisis of the 2000s
• Bubble in housing prices - prices went up because prices were going up. • Housing starts responded, and an oversupply resulted - especially in Cal., Nevada, Arizona, Florida. • Housing price crash began in 2006. • Deteriorated mortgage credit caused a reduction in supply of MBS. • System of securitization and investment failed due to lack of disclosure and asset value. • Development of systems including shadow banking as a result of investor's hunt for yield. • Government failed to oversee and regulate investment banks, the issuers of many of the failing-credit, mortgage-backed securities. • Government policy responded. Federal Reserve bought most mortgage-backed securities issued by Fannie Mae and Freddie Mac from 2008 to early 2010.
Measuring the Quality of a Neighborhood
• Housing prices - stability? - easy to observe • Renovations new construction - easy to observe • Safe and well-maintained buildings and public spaces - codes and inspections • Political engagement; neighborhood organizations - gaining momentum in some areas
