The Economy of Real Estate

Transcription

1 The Economy of Real Estate 2 Hours of Continuing Education Credits Module 1: 1. Real estate in the economy 2. Cycles and taxes 3. Demand for housing 4. Employment Rates and Mortgage Rates 5. Terms Module 2: 1. Economic Leaders 2. Indiana s Story 3. Case Studies 4. Other Issues Class Information: All cell phones, tablets and computers must be turned off during class. No audio or video recording is allowed at any time. Please be in your seat at the prescribed time. You must attend all of the class to obtain credit for the course. If you need to request a reprint of your certificate more than 30 days after the class has ended there will be a $10 fee. Certificates will be ed within 10 business days. RECP Instructors have full authority to refuse admittance or registration Use this handout to follow along and take notes.

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3 Module 1 Agenda: 1.) Real estate in the economy 2.) Cycles and taxes 3.) Demand for housing 4.) Employment Rates and Mortgage Rates 5.) Terms The Economy of Real Estate (3 CE Credits) Why is real estate so closely followed by economists? Real estate is a BIG part of the economy and economists follow it closely National Association of Home Builders 17%-18% GDP, Leading economic indicator Many businesses in a community benefit from housing sales ripple effect Real Estate First in and First out of a recession Huge part of the national economy Figures released by NAR are actively watched by economists Real Estate in the US Homestead Acts Fannie Mae Again, Real Estate is a major part of the economy Public policy encourages home ownership Land Ownership in the US The United States = Billion Acres Private owners and Native American Tribes own 72% of US land Foreign investors are attracted to the US because they can own land here when they often cannot own land in their own countries Land Ownership in the US The United States = Billion Acres Private owners and Native American Tribes own 72% of US land Foreign investors are attracted to the US because they can own land here when they often cannot own land in their own countries Economic Factors Household expenditures and economic downturns Major Recessions/Depressions o Great Depression & Recession o Recession o 1980, 1981 and Double dip Recessions o Great Recession 3

4 Housing Prices - Average Home Costs Taxes In 1970 = $23,400 In 1980 = $62, top rate 39.1% 2002 top rate 38.6% 2014 top rate 39.6% Increasing tax rates does not necessarily lead to higher income tax receipts Employment Last 10 recessions: Economy recovered all jobs lost after an average of 25 months By April, 2013, 64 months after the prior jobs peak, still have not recovered all lost jobs Longest period since Great Depression with unemployment 9% or above Unemployment forecasts GDP Lowest in 60 years Peaked at only 2.4% in 2010 George W. Bush, 9.2% Clinton: 13.9% By their fourth year in office Terms & Concepts Supply Side Economics: An idea from Classic Economic Theory and reinforced by the Laffer Curve. More supply of money leads to investment, job creation and creates demand. The Monetary policy from the Federal Reserve influences the amount of money and credit in the U.S. economy Open market operations: The Fed buying & selling securities. Influences interest rates banks charge each other Discount rate: The rate the Fed charges member banks on short term loans Reserve Requirements: The amount of a bank s deposits which must be kept on reserve (not loaned out) Multiplier Effect: - Higher reserve requirement = tighter money supply (lower multiplier effect for every dollar deposited) - Lower reserve requirement = larger money supply (more money is being created for every dollar deposited) State & Local Laws Migration continues from high tax states to lower tax states Regulations affect cost of housing 4

5 Economic Base Multiplier Dollars spent in a community are generally multiplied in effect by a factor between 2 and 3 Net effect of $1,000,000 per year payroll is 2 to 3 million Terms Inflation: increase in prices, sometimes rapidly Stagflation: high unemployment coupled with inflatioin Deflation: decline in prices Monetizing Debt: government buying back its own debt Inflation Stagflation Deflation Prices rise Issue for consumers when income does not rise Government has eleven baskets to calculate inflation Some do not contain food or fuel High inflation High unemployment Fall in prices Deflationary period: housing market Monetizing Debt Government buys back its own debt Can lead to inflation Can devalue the dollar Beyond Our Control Interest rates Supply Demand Unemployment rates Demographic changes Local moratoriums Negative external influences Real Estate Markets Are Influenced By Federal Laws and Policy e.g. the Fed, interest rates State Laws and Policy e.g. state s economy, tax structure, how certain things are funded Local e.g. local employment, local taxes, local moratoriums, etc. 5

6 Local Economy Large variances within a region Communities which rely in whole or part on one employer are vulnerable Demographics can vary greatly within county or region Tax structure, tap on fees, local moratoriums, all contribute to affecting this market Module 2 Agenda: 1.) Economic Leaders 2.) Indiana s Story 3.) Case Studies 4.) Other Isseus Equilibrium When supply equals demand (they are in balance) Real estate is an imperfect market (rarely in equilibrium Why? In a free market, an equilibrium will be established at a price which will result in a supply that will satisfy the demand of buyers. Demand & Money Housing has to correlate to a median income Relationship between rental rates and income; mortgage payments and income One thing seems certain: we aren t likely to see average 30-year fixed mortgage rates return to the historic lows experienced in The All-Time Records - Freddie Mac, March 24, 2014 Decade Average 30-Year Fixed Mortgage Rate Approximate Payment on a $200,000 Mortgage 1970s 8.86% $ s 12.70% $ s 8.12% $ s 6.29% $ Average YTD 4.36% $997 Forecast of 30 Year Fixed Mortgage Rate What Rising Rates Do 3.5% = $267, %= $236,833 6

7 5% = $223, % = $211,346 6% = $200, % =$189,853 Based on $1200 available for principle and interest; 30 year term Real Estate s Economic Contribution in Indiana Bureau of Economic Analysis: NAR Research The Real Estate Industry accounted for $34,240 million or 12.5% of the Gross State Product in 2011 Economic Contributions Are Derived From Home construction Real estate brokerage Mortgage lending Title insurance Rental and leasing Home appraisal Moving truck services Other related activities When a Home is Sold in Indiana Income generated from real estate related industries = $10,476 Additional expenditure on consumer items such as furniture, appliances and paint service = $5,647 Expenditure on remodeling within 2 years of purchase = $2458 It generates economic multiplier impact There is a greater spending at restaurants, sports games and charity events The size of this multiplier effect is estimates to be: $8,919 Additional homes induce additional home production Typically one new home is constructed for every 8 existing home sales For each existing home sale, 1/8 of net home value is added to the economy which is estimated in the state to be: $14,550 The Total Economic Impact of a Typical Home Sale in Indiana Median priced home: $116,400 Total income derived from a sale of a home: $42,049 Other Factors: Demographics Age Education Levels 7

8 Household formations Family size Income levels Real Estate s Economic Contribution in Indiana Bureau of Economic Analysis: NAR Research The Real Estate Industry accounted for $34,240 million or 12.5% of the Gross State Product in 2011 Case Study #1 Last year s absorption rate = homes on the market 2.5 year supply Supply UP Demand unchanged Prices DOWN Case Study #2 Existing housing stock inadequate New residents have higher income, higher expectations New jobs have a multiplier effect Many businesses in the community will benefit Case Study #3 Lowest price range = 6 months supply Next price range = 6 months supply Top 3 price ranges OUCH! Case Study #4 Persons ages: 1-18 year sold 20,000+/ year olds 10,000+/ year olds, 8,000+/- Market tailor made for 55+ communities Levels of Education: 14% = college degree 2% = advanced degree 70% = high school only 14% = never graduated high school 8

9 Appears young move away Lack of jobs Appears people return to retire Case Study #5 Excellent year Prices going up Keeping up with increases Analyze supply and asking prices Case Study #6 A cash strapped municipality decides to drastically increase local taxes on real estate Residents will vote with their feet Case Study #7: Pro or Con? In order to encourage people to remain in a particular city, a financing bond is changed, allowing first time home buyers who qualify to: o Obtain a first mortgage with 5% down at competitive rates through local lenders o Obtain second mortgage from the city for up to 10%, so it will cover closing costs and down payment o The second mortgage is interest free for the first 2 years and any remaining balance is forgiven if the homeowner is still in the home at the end of 10 years Filtering Down Housing trends to be passed onto lower economic groups Quality new housing availability causes move up buyers What demographic trends are you watching? Other Issues New household formation Shift in thinking due to Great Recession Employment o Boomers not retiring o Quality of jobs 9

10 Immigration National Debt Deficits at national, state and local level Unfunded liabilities Summary: Politicians make policy to try to influence economy Does not always work Unintended consequences abound Watch what is going on! Thank you for attending the course! Connect with RECP online. 10