Real Estate and the Economy

Nightly Trivia Q) What is considered one of the slimmest buildings ever designed? Q) What is considered one of the slimmest buildings ever designed? A) The Carnegie Hall Tower, designed by Cesar Pelli, is only 50 feet wide and 60 stories high A) The Carnegie Hall Tower, designed by Cesar Pelli, is only 50 feet wide and 60 stories high

Real Estate and the Economy Economic base Economic base Demand Demand Government policies Government policies

Economic Base for Property Survival – a region must export goods and services to support trade Survival – a region must export goods and services to support trade Economic base – ability to produce a commodity or service that can bring in money from outside its area Economic base – ability to produce a commodity or service that can bring in money from outside its area Base, export, or primary industries – industries that produce goods and services for export Base, export, or primary industries – industries that produce goods and services for export Service, filler, or secondary industries – producers of goods and services that are not exported Service, filler, or secondary industries – producers of goods and services that are not exported

Land Values Base industries matter – land is immovable Base industries matter – land is immovable Diversity of base industries reduces risk of variability Diversity of base industries reduces risk of variability Employment multiplier – generally, every 1 job in a primary industry supports 2 jobs in local service industries Employment multiplier – generally, every 1 job in a primary industry supports 2 jobs in local service industries

Housing Demand – Short-term Market cycles are relatively unpredictable Market cycles are relatively unpredictable Physical adjustments to market changes are slow Physical adjustments to market changes are slow Price adjustments to market changes can be rapid and dramatic Price adjustments to market changes can be rapid and dramatic Changes in housing construction alternate in a stair-step pattern based on changing demand Changes in housing construction alternate in a stair-step pattern based on changing demand

Housing Demand – Long-term Long-term demand predictions are based on population size and growth by age group Long-term demand predictions are based on population size and growth by age group Earning patterns based on a generation’s age indicate what level demand will be at in the future Earning patterns based on a generation’s age indicate what level demand will be at in the future

Government Impact Taxes – tax breaks on interest paid, property taxes paid, etc. have long served to encourage home ownership Taxes – tax breaks on interest paid, property taxes paid, etc. have long served to encourage home ownership

Tax Acts 1986: 1986: Repealed capital gain exclusion Repealed capital gain exclusion Repealed accelerated depreciation on real estate Repealed accelerated depreciation on real estate Extended minimum depreciation periods Extended minimum depreciation periods Placed limits on deductible real estate losses Placed limits on deductible real estate losses 1997: Reinstated capital gain exclusion Granted exclusions from income for sales of personal residences

Fiscal Policy (loan money) Because most people can’t pay cash for houses, loan rates and availability are very important Because most people can’t pay cash for houses, loan rates and availability are very important Many industries are impacted by the housing market, which hinges on fiscal policy Many industries are impacted by the housing market, which hinges on fiscal policy Generally, if the federal government lives within its means interest rates will decrease Generally, if the federal government lives within its means interest rates will decrease

The FED The federal reserve board sets monetary policy – it can create and destroy money The federal reserve board sets monetary policy – it can create and destroy money Mechanisms: Mechanisms: –Open-market purchase of Treasury securities –Changes in the discount rate to banks –Changes in the reserve requirements of banks

Money Creation and Destruction Short-term, increasing the money supply drops interest rates, which generates more purchasing Short-term, increasing the money supply drops interest rates, which generates more purchasing Long-term, increasing the money supply increases inflation, which decreases purchasing power Long-term, increasing the money supply increases inflation, which decreases purchasing power In times of inflation, people invest in hard assets such as homes and property In times of inflation, people invest in hard assets such as homes and property

What is Inflation? Cost-push inflation – the increasing cost of inputs necessary to manufacture a product or offer a service Cost-push inflation – the increasing cost of inputs necessary to manufacture a product or offer a service Demand-pull inflation – buyers bid against each other to buy something that has been offered for sale Demand-pull inflation – buyers bid against each other to buy something that has been offered for sale Monetary inflation – results from the creation of excessive amounts of money by government Monetary inflation – results from the creation of excessive amounts of money by government Real-cost inflation – caused by the increased effort necessary to produce the same quantity of a good or service Real-cost inflation – caused by the increased effort necessary to produce the same quantity of a good or service

Recent history ( ) Housing prices doubled and tripled in many places Housing prices doubled and tripled in many places The baby boom generation greatly expanded the housing market The baby boom generation greatly expanded the housing market Inflation adjusted cost of interest lagged behind inflation during the 70’s Inflation adjusted cost of interest lagged behind inflation during the 70’s 70’s wage increases were pushing people into higher tax brackets and making interest deductions more attractive 70’s wage increases were pushing people into higher tax brackets and making interest deductions more attractive

Slowing Down The federal government placed tighter restrictions on lending to slow inflation by 1980 The federal government placed tighter restrictions on lending to slow inflation by 1980 These regulations prevented many loan renewals which created problems for lenders compounded with falling property values in many areas These regulations prevented many loan renewals which created problems for lenders compounded with falling property values in many areas

Owner-Occupants Housing is very different than other real estate ventures Housing is very different than other real estate ventures Because owners are often the occupants, their primary concern is with living benefits, not appreciation of the investment Because owners are often the occupants, their primary concern is with living benefits, not appreciation of the investment

More About the FED Monetary base – legal reserves of banks at the Federal Reserve plus cash in the hands of the public Monetary base – legal reserves of banks at the Federal Reserve plus cash in the hands of the public Objectives for the American economy Objectives for the American economy –High employment –Stable prices –Steady growth in the nation’s productive capacity –A stable foreign exchange value for the dollar