1. Theory and Practice 7th Edition Terrence M. Clauretie G. Stacy Sirmans
REAL ESTATE FINANCE
Theory and Practice 7th Edition
Terrence M. Clauretie
G. Stacy Sirmans
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2. Finance and Real Estate
Chapter 1
Finance and Real Estate
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3. Chapter 1 Learning Objectives
Understand the relationship between finance and real estate
Understand how financial markets work
Learn, which major financial institutions direct the flow of funds
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4. What is Finance?
The study of the process, institutions, markets, and instruments used to transfer money and credit between individuals, businesses, and governments
Applied economics
Economics is the study of the allocation of resources for the purpose of producing goods and services for various members of society.
The study of how the flow of money and credit facilitates that production and allocation.
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5. What is Finance?
Considers time value of money (TVM) and implications of interest rates on TVM and financing decisions:
Focuses on cash flows, not profits
Makes extensive use of the concept of risk
Risk – the possibility that the actual result will differ from the expected outcome
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6. What is Real Estate Finance?
The study of the institutions, markets, and instruments used to transfer money and credit for the purpose of developing or acquiring real property.
Real property - the rights, powers, and privileges associated with the use of real estate.
Real estate - land and all fixed and immovable improvements on it.
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7. What is Real Estate Finance?
Includes the study of:
Residential and commercial properties
Terms of residential and property leases
Appraisal of residential and commercial properties
Financing of residential and commercial real estate
Valuation of mortgages
Real estate taxation issues
Primary and secondary mortgage markets
Securitization of mortgages
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8. The Environment of Real Estate Finance
Financial instruments are used to transfer money and credit for the purpose of developing and acquiring real property.
The institutions that create and purchase those instruments and the markets within which they are transferred constitute the environment of real estate finance.
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9. Real Estate as Portion of the Financial System
Table 1-1 Current-Cost Net Stock of Fixed Assets and Consumer Durable Goods (billion USD)
Source: Bureau of Economic Analysis
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10. Savings-Investment Cycle
An identity, whereby the amount of savings equals the total amount invested
Three groups of savings: by individuals, businesses, and the government
Investment considers amount invested in new plan construction, equipment and real property
The financial marketplace is the system whereby savings are transferred from what are termed surplus income units to what are termed deficit income units.
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11. The Environment of Real Estate Finance
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12. Financial Intermediaries
Financial intermediaries are financial institutions that channel funds from the surplus income units to the deficit income units.
Commercial Banks – accept demand and time deposits
Thrift Institutions – S&L associations; mutual savings banks; credit unions
Investment Companies – pool the funds of savers and invest the funds in a portfolio of assets
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13. Financial Intermediaries (Cont.)
Insurance Companies - receive periodic or lump-sum payments from individuals or organizations in return for a promise to make future payments if certain events occur
Pension Funds - pool the contributions of employees and invest the funds similarly to insurance companies
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14. Direct Financing
When the flow of funds takes place without the use of intermediaries
E.g. when a home seller grants a note to the home buyer
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15. Primary Mortgage Market
The market where mortgages are originated
Originators either hold mortgages in portfolio or sell them into the secondary mortgage market
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16. Secondary Mortgage Market
Major secondary market participants are the Federal National Mortgage Association (FNMA, or Fannie Mae), the Federal Hole Loan Mortgage Corporation (FHLMC or Freddie Mac), the Government National Mortgage Association (GNMA, or Ginnie Mae), the Federal Home Loan Bank Board
The secondary mortgage market agencies and firms purchase mortgages from other intermediaries or brokers that deal with surplus income units, using funds raised though sales of securities they create
Issue mortgage-related securities (MRSs) using mortgage pools as collateral
A large and active secondary market makes securities more liquid.
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17. Money and Capital Markets
Financial markets can be divided into two categories: money markets and capital markets.
Money markets deal in short-term securities (maturities of 1 year or less)
Capital markets deal in long-term securities (over 1 year in maturity).
Most real estate financing takes place in the capital markets.
Mortgages are long-term securities.
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