1. Chapter 10
Ch 10: Economic Trends in Real Estate Markets Students: we will only use the first 2.5 pages. You do not need to read after “Revitalization” on p 81

2. Efficient market vs. real estate markets Carefully study Exhibit 10.1
Efficient markets
Have many close substitutes like different brands of gasoline or types of bread.
Have many buyers and sellers at any point in time, so the market tends to balance at a competitive price.
Efficient markets often work with auctions or exchanges such as the New York Stock Exchange (NYSE).
Real Estate Markets have immobile, heterogeneous properties that sell in localized, segmented markets.
Search costs associated with matching buyers & sellers are significant
Prices are usually negotiated.
Chapter 10

3. Market Value on Efficient Markets such as the New York Stock Exchange (NYSE)
In markets such as stock markets with many participants & investment value revelation, all transactions take place near true market value
In such markets, no need for buyers & sellers to search for “true” market value of an asset;
it is continuously revealed by transaction prices of perfect substitutes.
Moreover, on the NYSE the heterogeneous investment motivations of buyers & sellers & their negotiation abilities have no role in the price formation process
Chapter 10

4. What About Real Estate Markets?
Every property is unique
Unique location; structure is immobile
Many & varied attributes sell in a local market
These heterogeneous assets trade in illiquid, highly segmented & informationally inefficient local markets
Search costs associated with matching buyers & sellers are significant
Chapter 10

5. Implications of Special Characteristics of Real Estate Markets
Even the few transactions of comparable properties that we do observe may not be indicative of the value of the “subject” property
Thus…..we need an army of “fee appraisers” to estimate the market value of real estate assets
Real estate markets differ from efficient markets such as the stock market. This is why price is not value in real estate markets whereas many investors in stock markets think that the current price is the best valuation at that moment.
Chapter 10

6. The first review exercise:
The correct lifecycle of real estate is a) growth, stability, decline and revitalization
The chapter has no good exercises on efficient markets vs RE markets
Chapter 10