Lecture 1

Lecture 1
Introduction to real
estate and Driving
Forces of Real
Estate Markets
INTRODUCTION
 the term real in real estate comes from the

term realty, which has, for centuries, meant
land and all things permanently attached
 the latter would include immovable things such
as buildings and other structures
 All other items not considered realty have been
designated as personalty, which includes all
intangibles and movable things
INTRODUCTION……..
 e.g., automobiles, shares of stock, bank

accounts, patents
 The term estate has evolved to mean “all that a
person owns,” including both realty and
personalty
 term realty is sometimes used, we generally
use the term real estate to mean land and all
things permanently attached.
INTRODUCTION……
 Hence, the portion of a person’s estate that

consists of realty has come to be known as
“real estate”
 What is real estate?
defined as the land and any permanent
structures, like a home, or improvements
attached to the land, whether natural or man-
made.
TYPES OF REAL ESTATE
 Residential real estate

 Commercial real estate
 Industrial real estate
 Land
 Special purpose
 What is Real estate finance then?
Factors affecting the value of real
estate
 location and factors such as

a) transportation facilities
b) crime rates
c) municipal services
d) employment rates
e) property taxes
f) the local economy
The pros and cons of investing in
real estate
Pros
Offers steady income
Offers capital appreciation
Diversifies portfolio
Can be bought with leverage
Cons
Is usually illiquid

Influenced by highly local factors
Requires big initial capital outlay
May require active management and expertise
QUESTION
 Discuss characteristics of real estate

“Markets”
“Mechanism through which all goods and services are
voluntarily exchanged among different owners”
Through price, markets allocate scarce resources among
competing uses.
Real Estate Submarket: “Property within a certain price

and quality range and within specified geographic
areas that potential tenants or potential buyers would
consider as alternatives when looking at a Subject
Property” Or the buying and selling of land and
buildings
Factors drives real estate market
Interms of
real estate prices
availability
and investment potential
factors that impact real estate prices, availability, and
investment potential.
1. Demographics provide information on the age,
income, and regional preferences of actual or
potential buyers, what percentage of buyers are
retirees, and what percentage might buy a vacation or
second home.
2. Interest rates impact the price and demand of real
estate—lower rates bring in more buyers, reflecting
the lower cost of getting a mortgage, but also expand
the demand for real estate, which can then drive up
prices.
3. Real estate prices often follow the cycles of the

economy, but investors can mitigate this risk by
diversified holdings that are either not tied to
economic cycles or that can withstand downturns.
4. Government policies and legislation, including
tax incentives, deductions, and subsidies can boost
or hinder demand for real estate
Factors influencing real estate
demand
 Rental rates
 Prices
 Other factors such as location, infrastructures

etc.
Rental Rates and Prices
 Single-Family, Owner-Occupied Market
– General Price Trends
– Long-term benefits
 Corporate World (long-term tenancy)
– Minimizing long-term occupancy costs
– Rent
 Investment World
– Rental trends AND Price Trends
Significant Influences
on Rents and Prices
 Global Influences
– Exchange Rates, Recessions, National Disaster
 National Influences
– Tax Laws, Interest Rates
 Local Influences
– Employment Trends, Social Patterns, Changes in
Development
Supply & Demand
SUPPLY = SELLERS / LANDLORDS /

AVAILABLE REAL ESTATE
DEMAND = BUYERS / TENANTS

Demand Curve
Price/Rent
As price decreases,
quantity demanded
increases
Quantity of Space
Short-Run Supply Curve
Price/Rent
Reflects inelasticity in
a Short-Run market
Quantity of Space
Long-Run Supply Curve
Price/Rent
Reflects more
elasticity in a Long-
Run Market
Quantity of Space
Characteristics of
Real Estate Markets
 Durability
– Inelastic short-run supply
 “Lumpy and Large” Economic Unit
– Infrequent Purchase
– Highly-levered industry
– Large shifts in supply within localized markets
 Costly Information
– Data not easily available
– Costs of Market Studies and Appraisals
– Search Costs
Characteristics of
Real Estate Markets
 High Transaction Costs
– Title Insurance, Broker Fees, Lending Fees, Inspections/Due
Diligence, Surveys, Endorsements, etc.
 Fixed Location
– Allows Real Estate to be Substitutable
 Heterogeneity
– Creates greater costs for market information and searching
 Government Regulated
– Limits Real Estate Use
– Can help or deter real estate use and value

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 the term real in real estate comes from the

 e.g., automobiles, shares of stock, bank

 Hence, the portion of a person’s estate that

 Residential real estate

 location and factors such as

Is usually illiquid

 Discuss characteristics of real estate

Real Estate Submarket: “Property within a certain price

3. Real estate prices often follow the cycles of the

 Other factors such as location, infrastructures

SUPPLY = SELLERS / LANDLORDS /

DEMAND = BUYERS / TENANTS

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