1. 1 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 1 THE DISCIPLINE OF REAL ESTATE Classical and Neoclassical Land Economics Ideas About Property Rights and Contracts Financial Economics The Institutions Technological Change

2. 2 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Classical Land Economics Value is derived from an asset’s utility and its scarcity. Value is determined by its relationship to the costs of production. Land owners receive what remains (the residual) after labor and capital costs are covered.

3. 3 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin The Neoclassical Tradition Value is determined by the intersection of supply (cost) and demand (utility). The fundamental factors of demand and supply explain much of the market’s behavior in valuing space.

4. 4 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Ideas About Property Rights and Contracts Value is greatly affected by property rights. Property and contract laws define the fundamental rights of property ownership. Contract laws facilitate the transfer of property rights. Lease and sale contracts enable prices to be established.

5. 5 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Financial Economics Real estate investment and valuation decisions require market analysis and the application of advanced financial techniques developed by financial economists.

6. 6 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin The Institutions Real estate values are affected by market and social institutions. Examples: –primary and secondary lending institutions –government agencies –real estate ownership types –household types

7. 7 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Technological Change Real estate values are affected by technological change –technological change and its effect on location decisions –e-commerce and its effect on real estate services –the internet and its effect on the availability of data

8. 8 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin REAL ESTATE IN THE WORLD ECONOMY The Relative Wealth of Real Estate Investments To Improve Land Who Owns America?

9. 9 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin The Relative Wealth of Real Estate In 1991, the total value of the world’s assets was estimated to be $44 trillion. –Real estate assets represent almost one-half of the world’s total wealth. –Real estate assets in the U.S. represent almost 30% of the world’s real estate wealth. –The value of residential property represents almost 75% of U.S. real estate.

10. 10 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Who Owns America? Observations from available data: –Home equity and residential mortgage debt constitutes the largest portion of U.S. real estate. –The value of residential mortgage debt is greater than debt on commercial property. –For commercial property, the value of unsecuritized mortgages far exceeds securitized.

11. 11 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin REAL ESTATE DEFINED The term real estate may refer to: –the land and all permanent attachments to the land, or –the bundle of rights associated with owning real property. In practice, real estate and real property are commonly used interchangeably.

12. 12 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin REAL ESTATE PERSPECTIVES The Investment Perspective The Market Perspective The Valuation Perspective The Mortgage Finance Perspective The Legal Perspective