Real Estate Exam 1 Chapter 1
Real estate has been estimated to represent what proportion of the world's total economic wealth? A) nearly a third B) about one-half C) just over two-thirds D) just over a quarter E) it is impossible to estimate
B) about one-half Real estate makes up about one-half of the world's total economic wealth.
What distinguishes real property from personal property?
A major determinant between real and personal property is whether or not the property is movable or permanently affixed to the land.
Real Estate markets differ from other asset classes by having all of the following characteristics except: A. Local Markets B. High transaction costs C. Segmented Market D. Homogeneous Product
Homogeneous product
What is the single largest asset category, in terms of value, in the portfolio of the typical U.S. household? A. Housing B. Consumer Durables C. Stocks D. Bonds
Housing
Storm water drainage systems are best described as: A. Tangible Assets B. Improvements to the land C. Intangible Assets D. Improvements on the land
Improvements to the land
The actions of local, state, and federal governments affect real estate values A. Primarily through user markets B. Primarily through the capital markets C. Primarily through their taxation policies D. Through all of the above
All of the above
The term real estate can be used in three fundamental ways. List these three alternative uses or definitions.
Real estate is most commonly defined as land and any improvements made to or on the land, including fixed structures and infrastructure components. The term is also used to describe the "bundle of rights" associated with the ownership and use of the physical characteristics of space and location. Finally, real estate may be described as the business activities related to the development, construction, acquisition, operation, and disposition of real property assets.
How much of the wealth of a typical U.S. household is tied up in real estate? How does this compare to the role that assets and investments play in the portfolios of U.S. households?
Real estate is the single largest asset in the typical U.S. household's portfolio, representing approximately 30 percent of household wealth in September of 2005. In comparison, the total value of corporate stocks and mutual fund shares represents 16 percent of household assets. Pension reserves, excluding stocks, represent 17 percent of household assets. Deposits and money market funds represent 9 percent of household assets.
Real estate assets and markets are unique when compared to other assets or markets. Discuss the primary ways that real estate markets are different from the markets for other asset that trade in well-developed public markets.
Real estate is unlike other asset classes because it is heterogeneous and immobile. Real estate assets have unique and distinctive characteristics, such as age, building design, and location. Real estate is also immobile; therefore, location is an important attribute. Because real estate assets are heterogeneous and immobile, real estate markets are localized. Potential users of real property and competing real estate are typically located in the same area or region. Additionally, real estate markets are highly segmented because of their heterogeneous nature. Therefore, potential users of a specific type of real property generally do not seek to substitute one property category for another. Finally, most real estate transactions are privately negotiated and have relatively high transaction costs.
Investible assets based on real estate are traded in each of the four capital market quadrants. List the four quadrants and at least one real estate asset that trades in each.
1. Private equity market - includes transactions of real property between individuals, firms and institutions 2. Private debt - includes the trading of home mortgages. 3. Public equity - investors trade real estate companies such as equity REITs 4. Public debt - Mortgage backed securities are traded
Identify four ways in which real estate markets differ from the market for publicly traded stocks.
1. Real estate is heterogenous product distinguished by its age, building design, and location. 2. Real estate is immobile and therefore location and its accessibility are important. 3. Real estate is a localized, segmented market due to local competition and the heterogeneous nature of the product. 4. Real estate transactions have high transfer costs, and deals are privately negotiated.
Which is an example of a homogeneous product? A) a gallon of gasoline B) a tract home in a new development C) vacant office space D) a and c only E) all of the above
A) a gallon of gasoline Although a tract home or office space may be similar to alternative homes or space, they still possess unique characteristics, such as location.
The market for buying, selling, and leasing real estate tends to be localized and highly segmented primarily because A) real estate is immobile. B) financing costs are high. C) of the need for strong negotiation skills. D) space can be easily substituted. E) a and b only
A) real estate is immobile. The heterogeneity and immobility of real estate are the primary factors that make real estate markets localized and segmented. Locations are unique!
Approximately what portion of U.S. households own their own home? A. Approximately one-third B. Approximately two-thirds C. Approximately one-half D. Approximately one-quarter
Approximately two-thirds
Describe the value of U.S. real estate by comparing it to the values of other asset classes (e.g., stocks, bonds).
As of September 2005, real estate (including owner-occupied housing, but excluding real estate held by non-real estate corporations) was the single largest asset class in the U.S., valued at approximately $23.4 trillion. Publicly traded corporate equities equated to about $17.2 trillion of the U.S. market. The value of mortgage debt is approximately $11.1 trillion. This is larger than the existing stock of both corporate and foreign bonds and the outstanding value of U.S. Treasury Securities.
Much of the undeveloped land in the United States is divided nearly equally between all of the following categories EXCEPT A) water areas and federal land B) pastureland C) cropland D) forestland E) all of the above are nearly equally divided between undeveloped land categories
B) pastureland While each category represents between 21 and 23 percent of undeveloped land, pastureland only represents about 6 percent.
The national government can influence the value of real estate by A) regulating building codes. B) increasing property taxes. C) changes in income tax policies. D) any of the above E) none of the above
C) changes in income tax policies. Property taxes and building codes are under the jurisdiction of the local government. Some building codes are also under the jurisdiction of the state government. However, federal income tax policies can have a significant effect on the desirability of investment property, thus affecting its value.
In what market are rental rates for commercial real estate assets determined? In what market are property values determined?
Commercial real estate rental rates are determined in local user markets, while property values are determined largely in the property market.
An acre may be defined as A) 640 square yards B) 209 feet square C) 43,560 square feet D) b and c only E) any of the above
D) b and c only
The U.S. represents about 6 percent of the earth's land service, or approximately 2.3 billion acres. Who actually owns this land? What is the distribution of this land among the various uses (e.g., developed land, federal, land, forest land).
Developed land, consisting of residential, industrial, commercial, and institutional land, represents approximately 6 percent of the total land in the U.S. Federal lands and water areas occupy about 23 percent of the land; crop land and CRP land represent about 21 percent; and pasture land comprises about 6 percent of the land. Finally, the remaining land is divided between range land and forest land, with each representing 21 percent of all U.S land.
Entrepreneurial-minded individuals seeking above average income may find business opportunities in A) brokerage B) leasing C) construction D) appraisal E) any of the above
E) any of the above Those with an entrepreneurial drive may find success and above average income in any of these fields of real estate!
Examples of improvements to the land include A) utility sheds and storage buildings B) streets and curbs C) sidewalks D) water systems E) b, c and d only
E) b, c and d only Structural improvements like storage sheds and buildings are improvements on the land.
Real estate construction is a volatile process determined by the interaction of the user and capital markets. What signals do real estate producers use to manage this process? What other factors affect the volatility of real estate production?
When real estate market prices exceed the cost of production, this signals producers to build, or add additional supply. As the supply of real estate increases, rental rates decline in the user market, which lowers property values and signals the real estate market to slow the production of real estate. Furthermore, shocks in the capital markets and the volatility of construction costs add to the volatility of real estate production. For example, higher interest rates adversely affect property values, all else equal, thereby reducing the attractiveness of new construction. Additionally, shortages of key building materials and organized labor disputes may contribute to the volatility of real estate production.
Identify and describe the interaction of the three economic sectors that affect real estate value
The three economic sectors that influence real estate value are user markets, capital markets, and government. In real estate user markets, households and firms compete for physical location and space. This competition determines who will obtain the use of a specific property and how much will be paid for the use of this property. Capital markets provide the financial resources necessary for the development and acquisition of real estate assets. Real estate competes for resources against other investment opportunities in the capital market based on investor required rates of returns and risk considerations. Capital markets are segregated into two categories: equity interests and debt interests. Government influences the interaction between the user markets and capital markets through tax policy, regulations, provisions of services and infrastructure, subsidies and other means.
According to Exhibit 1-3 U.S. households own $16.1 trillion in housing assets. Assume this amount does not include rental real estate. On average, what percent of the value of the U.S. housing stock is financed with home mortgage debt?
About 61% of the U.S. housing stock is financed with home mortgage debt. ($9.8 trillion in mortgage debt divided by $16.1 trillion in housing value.
Which of the following is not important to the location of commercial properties? A. Access to customers B. Visibility C. Access to Schools D. Availability of Communications infrastructure
Access to schools
Since 1982, the amount of developed land in the United States has increased nearly A) 19% B) 34% C) 52% D) 59% E) 67%
C) 52%
The market in which required rates of return on available investment opportunities are determined is referred to as the: A. Property Market B. User Market C. Housing Market D. Capital Market
Capital Market
Real property is a term that A) is synonymous with the term "real estate". B) includes intangible ownership rights. C) includes improvements. D) all of the above E) c only
D) all of the above
Which of the following attributes of a home are the most difficult to observe and value? A. Land/Site Attributes B. Structural Attributes C. Location Attributes D. Financing Attributes
Location Attributes
Of the following asset categories, which class has the greatest aggregate market value? A. Corporate Equities B. Mortgage Debt C. Government Debt D. Nongovernment Real Estate
Nongovernment real estate
What is difference between tangible and intangible assets? Does the ownership of "real estate" involve tangible assets, intangible assets, or both?
Tangible assets are physical assets such as land, automobiles, and buildings. Intangible assets are nonphysical, including patents, financial claims, or contractual agreements. Real estate is a tangible asset, but a bundle of intangible rights is also associated with the ownership and use of the property.
A market where tenant negotiate rent and other terms with property owners or their managers is referred to as a: A. Property Market B. User Market C. Housing Market D. Capital Market
User Market
Explain the role of government in real estate at the federal, state, and local level. Which has the most significant impact on real estate markets?
Local government has the most influence on real estate markets. It affects the supply and cost of real estate through zoning and land use regulations, fees on new land development, and restrictive building codes. It also affects rental rates through the assessment of property taxes. Finally, local government affects the supply and quality of real estate through the provision of community infrastructure and through building codes. The Federal government influences real estate through income tax policy, housing subsidy programs, federal financial reporting requirements, fair housing laws, and disclosure laws. State government generally has the least influence on real estate. State government affects real estate through the licensing of real estate professionals, establishment of statewide building codes, the creation of fair housing and disclosure laws, and through numerous housing related subsides for low and moderate income households. In addition, the state may protect some environmentally sensitive lands from development.
