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Unit 15: Key Points

These are the most important points for you to remember in this unit.

Immobility and Importance of Location in Determining Value

  • The location of real estate is fixed. Because real estate is immobile, its value is heavily influenced by changes of nearby land uses.
  • Highest and best use is determined by potential users bidding for a site based on its locational and environmental value of the site in each use.
  • Land cannot be destroyed except by erosion or avulsion. Appraisers use depreciation to measure the loss in value from the buildings and improvements to the land, but land does not depreciate.
  • Property insurance insures improvements only, not land.
  • No two parcels of real estate are exactly alike (homogeneous).

Economic Characteristics of Real Estate

  • Government Regulations Influence the Market.
  • Government actions and controls such as zoning, building codes, and tax policies have a major influence on the value of a parcel of land. 
  • Supply and demand affect real estate values. Changes in either the supply or demand for real estate will affect its price.
  • The market is slow to respond to change in supply and demand.
  • Overbuilding will take many years to get back in balance as new residents in the area buy and bring down the supply.
  • The example of a new factory will result in builders rushing to meet the increased demand.
  • Factors that influence demand for real estate include the
    • price of real estate (inverse),
    • population and household composition (direct),
    • income of consumers (direct),
    • availability of mortgage credit (direct), and
    • consumer tastes and preferences (varies).
  • Factors that affect the supply of real estate include
    • availability of skilled labor,
    • availability of construction loans and financing,
    • availability of land, and
    • availability of materials.

Interpreting Market Conditions and Market Indicators

  • Price is based on supply and demand. 
  • Vacancy rates—assume a small city has 100,000 houses. If 93,000 of the houses are occupied, the occupancy rate in the area is 93% (93,000 ÷ 100,000). 7,000 of the homes are vacant, so the vacancy rate is 7% (7,000 ÷ 100,000).
  • Ordinarily, a 95% occupancy rate is a balanced housing market. As the occupancy rate increases (and the vacancy rate declines), prices will tend to increase.
  • Area preference−Situs 
    • Real estate is fixed as to location.
    • Location is a parcel’s situs.   
  • Buyer’s market—a buyer’s market occurs when buyers have an advantage over the sellers in a market that has an oversupply. Prices tend to decline.
  • Seller’s market—a seller’s market occurs when the sellers have an advantage over buyers. If the inventory of available houses is in short supply, buyers are forced to pay higher prices demanded by sellers.