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Chapter 1 The Nature of Real Estate and Real Estate Markets. Real Estate FIN 331 Fall 2013.

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“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 4thed]

chapter 1 general concepts
Chapter 1 General Concepts
  • Types of Property
      • Tangible: Physical assets that can be owned. It can be real or personal property.
      • Intangible: Non-physical assets such as stocks, bonds, mortgages, leases
  • Real Estate as a;
      • Tangible asset: raw land, Improvements to raw land, structures
      • Bundle of Rights: exclusive possession, use, disposition, can be unbundled
      • As a profession
chapter 1 general concepts1
Chapter 1 General Concepts
  • Real Estate and the Economy
      • Half of the world’s wealth
      • Generates over 28% of U.S. gross domestic product (GDP)
      • Housing alone accounts for almost 20%
      • Generates nearly 70% of local government revenue (property tax)
      • Creates jobs for nearly 9 million Americans
  • Real Estate Values Determined by
      • User (Space) markets: physical real estate and supply vs. demand
      • Capital markets: RE competes for funds along with financial claims (stocks & Bonds)
      • Impact of governmental sector on rates: raising funds by selling debt securities.
chapter 1 general concepts2
Chapter 1 General Concepts
  • Real Estate Markets and Participants
      • User Market: Buyers receive rights (or bundles of rights), generally segmented
      • Capital suppliers: households >>> financial institutions (banks, financial service companies)
  • Characteristics of Real Estate Markets
      • Heterogeneous Products (no 2 alike in every aspect)
      • Markets localized and segmented
      • Private Markets
        • Equity/Owners: from individuals to partnerships to LLC to specialized funds
        • Debt/Lenders: Banks, thrifts, finance companies, private lenders
      • Public Markets
        • Publicly traded REITs and real estate companies
        • Commercial Mortgage-Backed Securities (CMBS) and mortgage REITs
the great real estate value melt down
The great real estate value melT-down
  • The Community Reinvestment Act (1977) [CRA]
      • Principle Objective: Increase home ownership in the US
      • Related Objectives: end practice of “redlining” by commercial banks
      • 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 down1
The great real estate value melT-down
  • CRA Act modified in 1995
    • Letter from General Council to Comptroller of the Currency
      • 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.

      • 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.

    • The beginning of NINJA loans (No Income, No Job, No Assets)
the great real estate value melt down2
The great real estate value melT-down
  • Michelle Minton (Competitive Enterprise Institute) on Negative Results of CRA
    • Increased risk to banks: as CRA rankings increased, bank risk increased as measured by CAMEL ratings (Capital adequacy, Asset quality, Management, Earnings, Liquidity).
    • Increased costs to small lenders: includes the cumulative costs of writing riskier loans (e.g.; to buyers with low FICO scores).
    • Cites study by George Benston (Emory U) suggesting that larger banks made loans in low and middle income markets (LMI) at a loss.
    • 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.
homework assignment
homework assignment
  • Important Key terms: Real Estate, Capital Markets, User Markets, Property Markets, Capitalization Rates, Tangible & Intangible Assets, Real Property
  • Study Questions: 1, 3, 4, 5, 7