Chapter 1

The Nature of Real Estate and Real

Estate Markets

Real Estate
FIN 331 Spring 2020
 Getting through the Course
A. Skim read assignments prior to class
B. Real Estate related articles frequently appear
in the media and will be sent to class as
supplemental readings – check your email
regularly.
C. Attendance Policy: I take attendance. More
than 2 unexcused absences will result in the
loss of one point for each additional absence.
 Getting through the Course
D. Homework will be collected at exam time.
H/W counts for 10% of our grade.
E. Exam Issues:
1. Please don’t kill your grandmothers. If you cannot
make the scheduled exam, email me BEFORE the
exam. We’ll schedule a later time. HOWEVER, the
later time must be before the next class period.
2. The Alternative is the “SOB” exam. Spare yourself
the grief. No one has passed the SOB exam.
 ANY QUESTIONS?

If not…Let’s start
 FIN 331 Course Objectives
 Extend a student's basic awareness of real
estate;
 real estate ownership,
 real estate value
 purchase and sale of varied interests in real estate
 real estate law and property rights
 fundamentals of finance as they apply to real
estate values
 “Real estate is the single largest
component of wealth in the global
economy. The importance of real
estate is highlighted in terms of its
roles in the global and domestic
economies, as well as its prominence
in the investment portfolios of U.S.
households.” [Ling & Archer, Real Estate 4 ed]
th
Aggregate Market Values of Selected Asset
Categories: 2011
U.S. Household Wealth: 2011
Land Use in the United States
% Distribution of Land Use

Millions of
Land Use Acres Percent

Forest 749 30.7%

Farm / Agricultural 530 21.7%
Grasslands 1066 43.6%
Developed (built up) 98 4.0%
2443 100.0%
 Chapter 1 General Concepts
A. Types of Property
1. Tangible: Physical assets that can be owned. It can be real or
personal property.
2. Intangible: Non-physical assets such as stocks, bonds,
mortgages, leases
B. Real Estate as a;
1. Tangible asset: raw land, Improvements to raw land, structures
2. Bundle of Rights: exclusive possession, use, disposition, can be
unbundled
3. As a profession
 Chapter 1 General Concepts
C.Real Estate and the Economy
1. Half of the world’s wealth
2. Generates over 28% of U.S. gross domestic product (GDP)
3. Housing alone accounts for almost 20%
4. Generates nearly 70% of local government revenue (property tax)
5. Creates jobs for nearly 9 million Americans
D.Real Estate Values Determined by
1. User (Space) markets: physical real estate and supply vs. demand
2. Capital markets: RE competes for funds along with financial claims (stocks
& Bonds)
3. Impact of governmental sector on rates: raising funds by selling debt
securities.
 Chapter 1 General Concepts
E.Real Estate Markets and Participants
1. User Market: Buyers receive rights (or bundles of rights), generally
segmented
2. Capital suppliers: households >>> financial institutions (banks, financial
service companies)
F. Characteristics of Real Estate Markets
1. Heterogeneous Products (no 2 alike in every aspect)
2. Markets localized and segmented
3. Private Markets
a. Equity/Owners: from individuals to partnerships to LLC to specialized funds
b. Debt/Lenders: Banks, thrifts, finance companies, private lenders
4. Public Markets
a. Publicly traded REITs and real estate companies
b. Commercial Mortgage-Backed Securities (CMBS) and mortgage REITs
Wall Street: Money Never Sleeps
Gecko’s talk on Financial Crisis
 Real estate as an industry and profession
 Brokerage  Planning
 Development  Government regulation
 Leasing and taxation
  Housing assistance
Property management  Mortgage finance
 Asset management  Construction finance
 Real Estate Law  Long-term finance
 Appraisal  Investment management
 Market consulting
 Counseling
 User Market
A. Market for the physical real estate
B. “Buyers” receive right to use space
1. Called the “space” market or “rental market”
C. Where prices/rents are determined
D. These markets are very “local” and usually
highly competitive
E. Separate local markets for various property
types: residential, retail, office, industrial, etc.
 Capital Markets
A. RE competes for funds in capital market with
other asset classes, such as stocks and bonds
B. Investors select a mix of investments based
on expected returns & risk
C. Bidding by investors determines:
1. risk free rates of various maturities (i.e., the
Treasury “yield” curve)
2. required risk premiums for risky investments
 Public Capital Markets
A. Small homogeneous units (shares) of
ownership in assets trade in public exchanges
B. Many buyers and sellers
C. Price quotes available for all to see
D. Characterized by a high degree of liquidity
E. Informationally efficient
 Private Capital/Property Markets
A. Absence of centralized market (or even price
lists)
B. Assets trade infrequently in private
transactions (thus a lack of transparency)
C. Common for “whole” assets to be traded in a
single transaction (indivisibility)
D. Less liquidity than public markets
E. Higher transaction costs
 Property (Asset) Market
A. Market for ownership claims to RE assets
B. Buyers/owners receive rights to cash flows
generated by leasing space to tenants
C. Demand (supply) side of property market is
made up of investors wanting to buy (sell)
property
D. Property market is integrated, not segmented
like space market
1. i.e., investment capital can come from anywhere
 HOMEWORK ASSIGNMENT

A. Important Key terms: Real Estate, Capital

Markets, User Markets, Property Markets,
Capitalization Rates, Tangible & Intangible
Assets, Real Property
B. Study Questions: 1, 3, 4, 5, 7
 THE GREAT REAL ESTATE VALUE MELT-
DOWN

A.The Community Reinvestment Act (1977) [CRA]

1. Principle Objective: Increase home ownership in the US
2. Related Objectives: end practice of “redlining” by commercial
banks
3. Requirements of the Act:
The Act requires banks and thrifts to make loans
throughout their entire market, operate depository
facilities in certain neighborhoods, and collect data
about lending habits to be periodically reported to
federal supervisory agencies. These agencies use CRA
ratings when evaluating applications for mergers and
acquisitions.
 THE GREAT REAL ESTATE VALUE MELT-
DOWN

A. CRA Act modified in 1995

1. Letter from General Council to Comptroller of the Currency
a. In Re Small Business Loans
Furthermore, the CRA regulations do not require an
institution to verify revenue amounts; thus, the institution
may rely on the gross annual revenue amount provided by
the borrower in the ordinary course of business.
b. In Re Consumer Loans
The CRA regulations do not require an institution to verify
income amounts; thus, the institution may rely on the income
amounts provided by the borrower on the loan application.
2. The beginning of NINJA loans (No Income, No Job, No Assets)
 THE GREAT REAL ESTATE VALUE MELT-
DOWN

C. Michelle Minton (Competitive Enterprise Institute) on

Negative Results of CRA
1. Increased risk to banks: as CRA rankings increased, bank risk increased
as measured by CAMEL ratings (Capital adequacy, Asset quality,
Management, Earnings, Liquidity).
2. Increased costs to small lenders: includes the cumulative costs of
writing riskier loans (e.g.; to buyers with low FICO scores).
3. Cites study by George Benston (Emory U) suggesting that larger banks
made loans in low and middle income markets (LMI) at a loss.
4. Rent Seeking opportunity for activist organizations: e.g., ACORN
received hundreds of thousands of dollars from JP Morgan and Chase
Manhattan Bank in exchange for ACORN’s approval of proposed
mergers.