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REAL ESTATE MARKET.
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Essay Subject:
Value, commercial vs. residential, pricing factors, types of financing, future. Charts.... More...
5 Pages / 1125 Words
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Paper Abstract:
Value, commercial vs. residential, pricing factors, types of financing, future. Charts.

Paper Introduction:
Introduction Real estate is one of the most critical aspects of the American economy. It represents one of the most significant investments that businesses or individuals make, and generally is the single most valuable asset on balance sheets and within an individual's portfolio. This research examines the real estate market in the United States, including factors that affect its pricing and trends that the market can be expected to take in the near future. Importance of Real Estate Real property and buildings have long been considered sound investments, more so than stocks, bonds, or even precious metals. Unlike currency, which can lose its value, or stocks, which can go down in price as companies' fortunes wax and wane, land has an intrinsic value because it

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And Thomas P. Thus a commercial center that has a 9 percent occupancy rate(meaning that 9 percent of the units are leased) has a higher value than asimilar development with only a 6 percent occupancy rate. Atthis point, gains from the improved economy stimulate prices, but lossesfrom interest rates and the inability of buyers to find reasonablefinancing may offset those gains. Because variable rate loans and creative financing is often tied toeconomic indicators, the overall economic health of the nation, or at leastthe region, can be critical to the pricing of real estate and theavailability of funding. Real Estate Financing One of the other factors which influences a real estate market is theavailability and type of financing that is used to fund real propertypurchase. Importance of Real Estate Real property and buildings have long been considered soundinvestments, more so than stocks, bonds, or even precious metals. If economic indicators are poor (as when a regionor the country is in a recession), pricing and funding also can bedepressed or nonexistent. Introduction Real estate is one of the most critical aspects of the Americaneconomy. Examples of this type of financinginclude negative amortization, in which the buyer's payment does not coverthe interest, let alone go toward the principal, during the first few yearsof the loan. For example, real property that is located near infrastructureitems such as transportation and related services has a higher value tocommercial tenants than real property that is located in rural areas oroutside of important labor markets.[3] Residential real estate prices are similarly affected by theenvironment in which it is located, but there is less emphasis oninfrastructure items, and more emphasis on ambiance and perceived qualityof living benefits.[4] Whereas the property value associated withcommercial property can be tied to rents or otherwise quantified, theproperty value associated with residential properties is generally moreesoteric. [2]Ibid. Variable rate mortgages have become popular recently as a way forpeople to enter the housing market who might not otherwise qualify forloans. Some individuals, for example, prefer to live in metropolitanareas, and so place a premium on properties in Boston or Los Angeles.Other individuals prefer rural living, and so place a premium on locationsin areas such as Carmel or Palm Springs. It represents one of the most significant investments thatbusinesses or individuals make, and generally is the single most valuableasset on balance sheets and within an individual's portfolio. At the sametime, geographic location and other factors influence the price of realestate. "Rate Rise Seen Hurting New Buyers." American Banker, June 15, 1994, 8.Meredith, Robyn. However, undeveloped property in areasthat are popular is worth more than the same amount (or even more) acreagein areas that are themselves not developed or which are not highlydesirable.[2] Commercial v. Little additional collateral is neededagainst real property since the property itself serves as security for theloan. Instead, financing options becomeintricate for individual purchasers of real estate. Charts[5] [pic] [pic][pic] BibliographyEhrhardt, Michael C. Ehrhardt and Thomas P. [5]"Business Week Index," Business Week, January 31, 1994, 87; April18, 1994, 139; July 25, 1994, 93; October 1 , 1994, 135; January 23, 1995,1 9; April 17, 1995, 111. Amenities in the area, includingschools, are important, as are tax considerations (which also play a factorin commercial real estate valuation). However, businesses arelikely to come into the area as prices drop, new homeowners are likely topurchase foreclosed properties, and real estate can thus help pull ageographic area out of economic trouble. Thisresearch examines the real estate market in the United States, includingfactors that affect its pricing and trends that the market can be expectedto take in the near future. Because real estate purchases involve large amounts of money,they are nearly always financed. Residential Real Estate Real estate can be classified into two types: commercial andresidential. "Money Growth and Supply Shock Effects." Managerial Finance, May 1994, 8-16. Ashousing starts increase, entire regional economies pick up, as well. The typical mortgageis a fixed rate mortgage, meaning that the interest rate remains the sameover the life of the loan (typically 3 years). During the beginningperiod of the loan, most of the payment goes toward interest, with only asmall percentage applied to principal. As rates increase,consumers with these types of loans are likely to refinance and move toconventional mortgages. The loan is then refinanced at the end of this period(sometimes referred to as a balloon payment) when the buyer is better ableto fund a larger loan (employment prospects having improved). Certainly the availability of funds and theassociated interest rates affect the pricing of homes and the number of newhome starts. Both residential and commercial real property is subject to theoverall health of the economy, as well, when it comes to valuation. Commercial real estate is used for industrial purposes and isgenerally owned by businesses or industry; residential real estate is, asits name suggests, occupied by individuals for their primary (or evensecondary) housing. Unlikecurrency, which can lose its value, or stocks, which can go down in priceas companies' fortunes wax and wane, land has an intrinsic value because itexists. "Rate Rises Cost Thrifts 4% of Value." American Banker, July 15, 1994, 3.Taube, Michael. Because real property comprises such a large portion ofany area's economy (through loans that fund the purchase of such property),a depressed real estate market can lead to a depressed area as a whole, andit can be difficult for the area to recover. Borrowers prefervariable loans when the initial rate is lower than that for a fixed rateloan, but take on the additional risk that the variable rate will increaseto a point higher than the fixed rate. [3]Michael Taube, "Money Growth and Supply Shock Effects," ManagerialFinance, May 1994, 1 . Adepressed geographic area (such as Texas during the early 198 s) cannotsupport high real estate prices in either the commercial or the residentialsector. Other creative financing arrangements have come into being in the lastseveral years which use the concept of variable rate financing, or acombination of fixed and variable. [4]Edward Kulkosky, "Rate Rise Seen Hurting New Buyers," AmericanBanker, June 15, 1994, 8. Boehm. "Reverse Mortgages and Interest Rate Risk." Journal of the American Real Estate & Urban Economics Association (Summer 1994): 387-4 8.Kulkosky, Edward. Similarly, residential buyers are affected by interest rates, althoughfew individuals receive the prime rate. To some degree, the value of land and real estate is determined byits potential use; land which is not used is typically valued less thanland that is.[1] As a result, developed property is worth more thanproperty that is not developed. ----------------------- [1]Michael C. Economic indicators suggest that housing will indeed pick up in thenear future, but the interest rate increases may offset these gains. These mortgages do not have the same interest rate over their life,but vary based on some indicator (T-bills, for example). These types of loans are popularwith first-time home buyers who might not otherwise be able to obtainfinancing, and are popular when rates are low. Future Prospects As the American economy has improved in the 199 s, the housing markethas also picked up. The construction industry involves not just thoseassociated with the building of the structures, but also plumbers,electricians, home furnishing companies and even interior decorators. Over the life of the loan, thepercentages change and eventually reverse. Factors Affecting Real Estate Prices Real estate values are based on potential uses of land and currentuse. Multi-family housing may be owned by businesses forinvestment purposes, but this research considers primarily owner-occupiedresidences when considering the residential real estate market. As result, property values fall to levels that can be supported bythe local economy. Boehm, "Reverse Mortgages andInterest Rate Risk, Journal of the American Real Estate & Urban EconomicsAssociation (Summer 1994: 388. Interest rates are therefore a key factor influencing whether acompany makes a decision to purchase a particular piece of property. For commercial customers who have strongcredit, such purposes may be made at the prime rate (this is the rate thatbanks charge their best customers).

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