Transcript Chapter 5 Residential Market Analysis

Chapter 5
Residential
Market Analysis
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Major Topics
 Demand drivers for home ownership
 Drivers of long and short term owner
occupied housing market
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The decision to buy or rent
The cost of home ownership
Calculating what you can afford
How the government supports mortgage
lending and discourages discrimination
Age and ownership
Simple models of multifamily housing
analysis
The dynamics of rental housing market
Trends in residential housing
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Introduction
 Residential structures account for 24% of
value of all assets owned in U.S.
 Each generation desires bigger and better
homes
 Average new housing is 25% bigger
than what it was fifty years ago
 Home ownership rate has been rising
steadily
 64% in 1990 to 68% in 2002
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Is Home Ownership a Right?
 Home ownership is thought to provide not
only shelter and comfort but also some
degree of financial security, and in some
cases significant investment returns as
well
 In a capitalistic system, no one has a
“right to home ownership”, but safe and
healthy housing for all citizens is
considered a national priority – much like
full employment
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Long Term Demand for Housing
 Demand for housing is a function of:
 Household growth rate
 General economic productivity
 Indicators of housing demand:
 Population
 Household sizes
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Long Term Demand for Housing
(Contd.)
 What influences Household Size?
 People are living longer – more of life
spent without children at home
 Women outlive men – more widowed
single households
 People are having fewer children
 More women participating in the
workforce
 Divorce rate in the U.S. has been
steadily rising
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Regional Demand for Housing
Factors leading to absolute and
relative growth in the number of
households:
 Size of existing population
 Job Growth (especially within export
sector)
 Overall Quality of Life
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Short Term Demand for Housing
 Dominant factors for short term
demand:
 Mortgage interest rates
 Seasonality (climate, schools,
holidays)
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
The Buying vs. Renting
Decision
Economic Factors
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Capital constraints
Expected tenure
Income tax rate
Tax laws for capital gains
Mortgage rates & Financing programs
Investment aspects (expected
appreciation)
 Budgeting risk
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
The Buying vs. Renting
Decision (Contd.)
Psychological Factors
 Control over housing unit (design,
appearance)
 Long term housing aspirations
 Ego satisfaction and utility of ownership
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
How Much Home can one Afford?
 Sources of capital : Equity or Debt
 The before tax costs of owning a
home include:
 Mortgage payments (most
significant)
 Property taxes
 Property insurance
 Utilities
 Maintenance
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Federal Government Assistance
 VA
 FHA
 GNMA
 FHLMC
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Housing Products and Demand Segments
Product Segmentation
 Single family detached
 Single family attached (usually
condominium)
 Manufactured housing
 Mobile homes
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Analysis of Housing Market:
Demand
 Simple Population and Household
Trending
 Estimating demand based on
employment growth
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Analysis of Housing Market:
Supply
Developer Monitoring
 Estimating the supply coming online
is very difficult due to large number
of developers of varying sizes
 It is very easy to supply too much
housing and the housing market
tends to move in cycles
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
The Integrated Development Model:
Short Term Modeling of Demand & Supply
 Apart from aggregate market
analysis, developers use a simple
model:
 “Keep building units as long as
they sell or rent”
 Short term indicators are:
 Occupancy rates (conversely
vacancy rates)
 Waiting lists
 Recent rental growth rates
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Housing Market Dynamics:
Searching for Equilibriums
 Supply and Demand are bought
together by “price”
 Economic principles to understand
housing markets
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Patterns of Possible Rental
Housing Market Changes
 Two general processes which bring
a market back to long run
equilibrium after a change in
demand or supply:
1. Demand increases or supply is
reduced
2. Demand is reduced or supply
increases beyond equilibrium
levels
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Demand Increase or Supply Reduction
Rent
D2
D1
1st
S1
S2
2nd
Q1
Q2
Supply
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Supply Over-shoots Demand
S1
Rent
1st
D1
S2
2nd
1st
2nd
Q1
And
Q3
Q2
Supply
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Senior Housing Options
Seniors’ location preference:
 Warmer Climate
 Low income tax
 Close to prior housing location
Senior Housing Options:
 Active Adult Community Independent
Living Housing
 Congregate Housing with Assistance
 Congregate Housing with Assistance
and Nursing
 Skilled Nursing Homes
 Alzheimer’s Specialized Care Centers
 Hospice Centers
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Trends in Housing Market
 New economy has increased the population of
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mobile workers
Mobile worker travels frequently and more
wealth and higher income
More and more households own second homes
today
If this trends continue people will have three or
four homes strategically located for business or
pleasure
Internet has put pressure on brokerage costs
and this may result in increased buy and sell
transactions
Senior population has increased much faster and
housing suiting their needs will have good
demand
A permanent renter market is also becoming
more common
Apartments are getting bigger and better
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
END
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner