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Factors affecting evaluation (land, modifications, location) & CA real estate compared to rest of U.S.... More...
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Paper Abstract:
Factors affecting evaluation (land, modifications, location) & CA real estate compared to rest of U.S.

Paper Introduction:
Real estate is defined as the "land and the improvements made to land, and the rights to use them" (Newton, et al., 1989, p. 15). Of the three factors of production (land, labor and capital), it is the most fixed: there is a finite amount of land available. Unlike labor, which changes as generations age, and capital, which changes with technology and innovation, land is indestructible. The land that sits beneath Manhattan is the same physical land which was purchased from the Indians, although the purposes for which the land is used, and the people using the land, have changed many times over since that purchase. This research examines the nature of real estate in general, and focuses on the differences felt between California real estate and real estate in the rest of the country. In order to understand California real estate, it is

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15).Such loans contributed to the oversupply of housing and office space, butalso enabled developers to build with very little of their own capital. The reasons for these disparities (prices ranged from $82,338 inCorpus Christi to $1,491,667 in Beverly Hills) are based in the areapreferences associated with the various locations. The land that sits beneath Manhattanis the same physical land which was purchased from the Indians, althoughthe purposes for which the land is used, and the people using the land,have changed many times over since that purchase. As baby boomersmature and retire, there will be fewer workers in the workplace, and thusdemand for office space will decrease (p. (199 , June). 5 ). Woodyard, Chris. Hamel, Ruth and Tim Schreiner. Therailroads augmented their land holdings by purchasing additional acreage onthe open market (although there is some dispute over the fairness of theirdealings). An economy whichgenerates that level of activity requires tremendous input from the factorsof production, and California has that: geographically, it is the thirdlargest state in the country (behind Alaska and Texas); in population, itis the largest. But the recession has kept that supply from beingused, and projections for absorption range from two years to more than ten,depending on the market (p. 36). Asa result, when the property did not sell (or lease) and the developer wasunable to realize any profit, he often had no equity in the property atall. Los Angeles Times, pp. Office vacancy rates in Los Angeles, Orange County and San Diegoexceed the national average by 5 percent, (Karmin and Cohen, 199 , p. Time 131, p. 13). Shiver, Jube. (199 , January-February). As the housing slump spreads tothe pacific coast. Jacobus. Other analysts consider the areapreferences and improvements in California, and expect that the state willcontinue to outpace the nation as a whole in housing and office property:"People are always going to pay more for a property in Malibu than theywill for a home that overlooks cornfields" (p. News and World Revort 1 9, p.44. 22. D1, D5.----------------------- 1 One way to compare real estate prices across the country is to selecta specific property with specific characteristics and compare the cost ofthat property across the nation. Another example is the land grants given to the railroads toencourage them to build the transcontinental line which brought the Eastand West coasts together. References Brandt, Ellen. Santa Fe Southern Pacific's California real estate holdings arecomposed primarily of office and industrial space, which are onesignificant component of California land. 44)exceeding rates of several years ago by more than 15 percent (Huges andSternlieb, 199 , p. This is not to say that parts of the land (such as gravel,dirt, minerals), or the product of the land (fruits, vegetables) cannot beremoved; rather, that the parcel of land itself is immobile.Indestructibility refers to the durability of land. 72). More manufacturing jobs are created in Californiaeach year than in all of Western Europe, making it additionally attractiveto immigrants from other parts of the nation: immigration accounts for 45percent of the state's annual increases in population (Harris, 199 , p.72). In fact, in recent years, thepercentage of Americans who own their own homes dropped from 65.6 percentin 198 to 63.8 percent in 1988 ("No Vacancy," 1988, p. These include scarcity,modifications, permanence of investment and area preference (Newton, 1989,p. The difference isthat California's downward trend is also outpacing the downward turn in therest of the nation. Its climate is mild, particularly inSouthern California, which translates into lower fuel bills for bothindustry and residents. Fixity, or investment permanence refers to the long periods of timegenerally associated with paying for land, buildings and other improvementsmade to real estate. Therefore, prudentinvestors take into account this long payback period when considering whichpurchases to make. The savings and loan crisis has also influenced real estate in thatbanks and other thrift institutions are less likely to make 1 and 11 percent loans to developers as they did in the 198 s (Evans, 1991, p. Is the California land rush onagain? 15). 22). These are important considerations whichaffect the value of a particular piece of property. Land scarcity isalso related to man's ability to make land more productive. Real estate is defined as the "land and the improvements made toland, and the rights to use them" (Newton, et al., 1989, p. Developers areunable to sell houses, but have to pay the interest on the debt theyincurred to build them (Evans, 1991, p. For instance,improved technology has led to increases in agricultural productivity,meaning that farmers are able to receive higher yields from the same amountof land. Residential and commercial property will both be affected by theaging of the baby boomers in coming years, a demographic factor whichfavors California, which is a popular retirement location. The Homestead Act is one example of this,where citizens were provided with deeds if they worked the land for fiveyears. Unlike labor, whichchanges as generations age, and capital, which changes with technology andinnovation, land is indestructible. Overbuilding in residential and office buildings has generated muchof the oversupply: 38 percent of office buildings, 33 percent of shoppingcenters and 25 percent of industrial space was produced during the 198 s(Evans, 1991, p. One parcel of land is distinct from another, althoughthey may be located next to each other. Karmin, Monroe W. In California, the median price was $19 ,35 ,down 5.6 percent (p. (1991, February 22). Real estate 1991 - theparty's over. In 1989, the nationwide median price for a home was$116,5 , down 3.3 percent. Real estate speculation, purchasing land and holding it on theassumption that it will increase in value, has been a part of economicssince private property was recognized. Agricultural land value is subject to weather,transportation and water availability. U.S. 4 41. 22). Of thethree factors of production (land, labor and capital), it is the mostfixed: there is a finite amount of land available. No vacancy. 72 - 73. Bank of America, Wells Fargo and Security Pacific Banksare all based in California, which also has a strong foreign trade,particularly with the Pacific Rim. As a result a number of developers were forced out of business bybanks who took the property when the developers were unable to service thedebt (p. D6. The other components includeresidential, agricultural and retail. and Gary Cohen. Because real estate may be put todifference uses over time, and because location preference is based onhuman desires, which also change with time, factors which make a piece ofproperty valuable at one point in time may not be able to support theproperty's price over an extended period of time. Thegovernment has, on occasion, become involved with land distribution and, asa result, with speculation. In fact, the largest single group of assets held by the Santa FeSouthern Pacific Corporation is its real estate, valued at between five andnine billion dollars in June 1988 (Hamel and Schreiner, 1988, p. 5 ). Koretz, Gene. 13). 37). Chief Executive, pp. (199 , November 12). Study forecasts regional parity inhousing prices. development. Land along the track.American Demographics 1 , pp. Evans, Mariwyn. An office building or apartment complex may require2 or 3 years of income to pay for the cost of the land, building andinterest on the borrowed funds (Newton, 1989, p. This research examinesthe nature of real estate in general, and focuses on the differences feltbetween California real estate and real estate in the rest of the country. Finally, land is nonhomogeneous, meaningthat it is unique. Land will be put to other uses and returns will increase,although perhaps not in any manner foreseeable to current experts (Brandt,199 , p. Journal of Property Management 56, pp. For residential property, keycharacteristics are two-fold: natural (weather, air quality and proximityto recreation areas); and man-made (job opportunities, transportation,shopping and schools). Scarcity occurs when there is excess demand and limited supply of agood; with land, it is a man-made phenomenon. The cost of living, availability of jobs and higher standard ofliving are reasons that people seek out California, all of which conspireto push housing prices higher than in other parts of the country. State's home buyers paydearly for sun and fun. California's medianhome price continues to outpace prices in other parts of the nation and ismirroring the downward trend, as the nation as a whole. California real estate isscarce in markets such as San Francisco and Los Angeles, but notnecessarily throughout all areas of the state (p. In a recession, businessesand individuals alike are unlikely to take on new debt or increase theircurrent debt, and so they are less likely to relocate to new, moreexpensive space. (1991, April 18). Of course, the economicdurability (that is, the demand for the land or its products), may differfrom its physical durability. Analysts generally believe the current downturn in real estate to beshort-term. demographicsvs. Suchincreased productivity reduces the demand for additional agricultural land,rendering it less scarce than before the technology was introduced.Replacing single family homes with multi-family dwellings on the sameparcel of land has a similar effect. In order to understand California real estate, it is necessary tohave an understanding of the factors which affect real estate valuation.These factors begin with the physical characteristics of land: immobility,indestructibility and nonhomogeneity (Newton et al., 1989, p. In a market already facinghigh vacancy rates, this will encourage alternate use for office space. Some observers find that housing and office pricedisparities, such as those that exist between California and the rest ofthe nation, are likely to decrease in the near future as employers relocateto areas with lower costs of living. 12). Inall, the company controls more than three million acres across 14 states(p. Not one ofthe ten lowest-priced cities was located in the state (Woodyard, 1991, p.D1). 28. In February 1991, California citiesboasted seven of the top ten, and all of the top five, prices for a four-bedroom, 2 and one-half bath home measuring 2,2 square feet. 4 ). Harris, Michael T. (199 , May). Industrial property is influenced by infrastructurefactors such as power and water availability and cost, and the demographicsof the labor supply. While there is a limited amount of land in California, muchdevelopment took place during the 198 s, at a rate which outstrippeddemand. In the United States, manycompanies and individuals have engaged in such speculation, sometimesmaking large sums of money, and sometimes losing equally large sums. Individuals concerned about whether they will have jobs,or whether they will be forced to endure pay cuts, are unlikely to go outand purchase a new, more expensive house. 34).Immobility refers to the fact that land cannot be moved from one locationto another. Business Week, p. Large real estate grants from the federal government in the 18 sprovided the incentive to complete the transcontinental railroad. Modification also greatly influences land use and value. "If California were a separate nation, it would have the seventhlargest gross national product in the world," according to Tom Gau, ofKavesh and Gau, financial planners (Harris, 199 , p. Newton, Joseph, Bruce Harwood and Charles J. The concept of economic scarcity has also affected California realestate. 5 -52. (1989).California Real Estate. While companies whichissue stocks and bonds may disappear, and governments which issue papermoney may be overthrown, land is permanent. 38). American Demographics 12, pp. Real-estatetremors jolt California's big banks. ----. In addition to the physical characteristics of land, there areeconomic characteristics which must be considered. 28). The company owns 2 8undeveloped acres of land near San Francisco's financial district, thecurrently unused downtown San Francisco Southern Pacific headquarters and a47 percent interest in the Pacific Design Center in West Hollywood (Hameland Schreiner, 1988, p. The railroad's California holdings account for the bulk of itseconomic, if not physical, real estate holdings. (1991, January-February). Forexample, land which is located in a flood basin becomes more valuable if adam is built upriver; the Aswan dam in Egypt is one example of this type ofmodification. 12). and George Steinlieb. 12 - 18. On theother hand, factors such as smog, traffic and crime lead to those alreadyliving in California to move out of the area, most notably to Oregon andWashington (Woodyard, 1991, p. But real estate, and especially California real estate, has undergonesevere changes during the 198 s. 15). Property management 2 .Journal of property Management 55, pp. D5). There is another factor which influences the real estate market, andthat is the state of the economy as a whole. Atthe same time, developers have been building houses based on the babyboomers, desire to purchase their own homes. Growth rates and appreciation soaredduring the 1987 - 1989 period, with some properties increasing by as muchas 5 percent on the West Coast (Koretz, 199 , p. Englewood Cliffs, NJ: Prentice-Hall. Los Angeles Times, p. Hughes, James W. As the boomers leave thehousing market (as they reach old age), there may well be an oversupply ofhousing which, if not picked up by immigrants to the country, will resultin lower housing prices (p. This is easiest to do with residential oroffice space, where characteristics, such as number of bedrooms and squarefootage, are readily available. The land itself has not changed, but the productivity has. 4 ). (1988, June). (1988, April 11). Similarly,although a house may be moved from one location to another, its value maydecrease when it is relocated. 4 ). More than 1 years after some of these acquisitions were made,railroads continue to control large tracts of land: timberlands, oil fieldsand urban developments sites included. Improvements which will be outdated in five years, butwhich require 2 years to pay back, are not wise investments. 5 ). 12 - 17. (199 , August 2 ). Location preference considers the location of real estate from aneconomic, rather than physical, perspective. 12).

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