Chapter 2 Understanding Real Estate Markets Idealized Supply & Demand Model –Many buyers and sellers –Knowledge of the market –Products are identical or similar –Supply is flexible in short term –Purchases are small and frequent –Space is not a factor in the analysis

Chapter 2 Understanding Real Estate Markets RE Resources: Supply Factors - Improvements –Real estate improvements - buildings and other structures –Supply is fixed in the short run –Supply of services is responsive –Additions to supply are small –Additions based on future demand –The cost and availability of financing

Chapter 2 Understanding Real Estate Markets Impact of Uniqueness Defining real estate markets –Geographic Location –The Neighborhood –Property type –The District –Use type

Chapter 2 Understanding Real Estate Markets Impact of Uniqueness Degree of Competition –Imperfect Markets

Chapter 2 Understanding Real Estate Markets RE Resources: Supply Factors - Land National land supply - 75% Open –Urban areas 1.6% > 2500 –Agricultural areas Local land supply

Chapter 2 Understanding Real Estate Markets Real Estate Resources: Demand Factors Income Employment Population

Chapter 2 Understanding Real Estate Markets Changes in Demand Increase in use of existing properties Increase in prices and rents Increase in construction and supply

Chapter 2 Understanding Real Estate Markets Price-Distance Relationships Locational Analysis Linkages Spatial Growth CBD vs. Rural

Chapter 2 Understanding Real Estate Markets Highest and best Use is defined in the Dictionary of Real Estate Appraisal, 3rd edition, page 171, as: –"The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability."

Chapter 2 Understanding Real Estate Markets Highest and Best Use Concept That use of the land likely to produce the greatest long-term economic return to the owner. Vacant land Land with improvements –Interim use –Adaptive use Returns to owner versus returns to society