REAL4000 Test 1
Kate Shealy
Reminder:
Important Characteristics
of Real Estate
A perfectly competitive market has:
● Many buyers and sellers
● Homogeneous goods
● Perfect information
● Full mobility
● No spillovers
THIS IS NOT TRUE FOR THE REAL ESTATE MARKET!
1. Durability:
● Even poorly built real estate lasts for a relatively long period of time.
● Real estate has an inelastic supply, meaning that slumps can last a long time.
● Both good and/or bad decisions can impact an area for years to come.
1. Lumpiness:
● Real estate is usually added to the market in large chunks, which means a single
development project can leave a lasting impact on the market.
● Supply stays in front of demand, which makes it difficult to know the right time to begin a new
real estate project.
1. Imperfect Information:
● The value of real estate is not ‘known’ like it is for stocks and bonds; because of this real
estate has “price dispersion” or a range of potential values for a property.
● A lot of times the seller know more than the buyer and they are able to use this to their advantage
when selling properties, this is called “information asymmetry”.
1. High Transaction Costs:
● Real estate is very costly because of two things: brokerage fees (between 5-10%), and
search costs (the uncertain time on the market for sellers, and the time/effort put into
comparing properties for buyers).
1. Immobility:
● Supply can NOT be shifted from market to market; shortages and surpluses can NOT coexist.
● To consume the product you also consume the location (you pay for the location of your
property when you buy it).
1. Perfect Heterogeneity:
● Two properties can NOT be in one location (obviously), so every property is a
“locational monopoly”. Every property is unique.
, ● Because every property is unique there are NO perfect substitutes (this only matters for
larger, more unique properties).
1. Positive and Negative Externalities:
● Due to location being such a huge factor spillovers are unstoppable, these can be positive
or negative:
a. Positive:
● Walmart bringing business to neighboring retail properties
● Aesthetic improvements of neighboring properties raise the value of your own property.
a. Negative:
● High traffic impacts neighboring residential properties
● Neighboring properties not keeping up with the presentation of their homes impacts the value
of your own
THIS IS THE REASON FOR ZONING!
Legal Determinants of Value
What is Real Estate? Real Estate is the right to land and its permanent structures.
What are Rights? Rights are claims or demands that the government is obligated to enforce; these
are non-revocable and enduring.
1. Personal Rights: these are rights laid out by the constitution.
2. Property Rights: these are “rights to things”, and are derived from legal tradition. There are
three fundamental rights to property:
● Exclusive possession, meaning you have the right to prevent others from using your own
property.
● Use and enjoyment
● Disposition, meaning you have the right to sell it or get rid of it when you feel you
should. Personal Dimension: what you, as an owner, have rights to. These rights can be
separated.
1. Surface Rights: this is what we actually own: the raw land, improvements TO that land,
and improvements ON that land. There are two different rules for water rights:
● Riparian Rights: you can use as much of the water source as you desire as long as it does not
affect the downstream users.
● Prior Appropriation: the first person to put a water source to beneficial economic use obtains
the rights to that source.
1. Subsurface Rights: this is everything below the surface:
● Mineral Rights
● Rule of Capture
1. Air Rights: this is the rights to the air as high as it is feasible to build.
*Fixtures or permanent structures can get a bit iffy. Fixtures are determined by:
Kate Shealy
Reminder:
Important Characteristics
of Real Estate
A perfectly competitive market has:
● Many buyers and sellers
● Homogeneous goods
● Perfect information
● Full mobility
● No spillovers
THIS IS NOT TRUE FOR THE REAL ESTATE MARKET!
1. Durability:
● Even poorly built real estate lasts for a relatively long period of time.
● Real estate has an inelastic supply, meaning that slumps can last a long time.
● Both good and/or bad decisions can impact an area for years to come.
1. Lumpiness:
● Real estate is usually added to the market in large chunks, which means a single
development project can leave a lasting impact on the market.
● Supply stays in front of demand, which makes it difficult to know the right time to begin a new
real estate project.
1. Imperfect Information:
● The value of real estate is not ‘known’ like it is for stocks and bonds; because of this real
estate has “price dispersion” or a range of potential values for a property.
● A lot of times the seller know more than the buyer and they are able to use this to their advantage
when selling properties, this is called “information asymmetry”.
1. High Transaction Costs:
● Real estate is very costly because of two things: brokerage fees (between 5-10%), and
search costs (the uncertain time on the market for sellers, and the time/effort put into
comparing properties for buyers).
1. Immobility:
● Supply can NOT be shifted from market to market; shortages and surpluses can NOT coexist.
● To consume the product you also consume the location (you pay for the location of your
property when you buy it).
1. Perfect Heterogeneity:
● Two properties can NOT be in one location (obviously), so every property is a
“locational monopoly”. Every property is unique.
, ● Because every property is unique there are NO perfect substitutes (this only matters for
larger, more unique properties).
1. Positive and Negative Externalities:
● Due to location being such a huge factor spillovers are unstoppable, these can be positive
or negative:
a. Positive:
● Walmart bringing business to neighboring retail properties
● Aesthetic improvements of neighboring properties raise the value of your own property.
a. Negative:
● High traffic impacts neighboring residential properties
● Neighboring properties not keeping up with the presentation of their homes impacts the value
of your own
THIS IS THE REASON FOR ZONING!
Legal Determinants of Value
What is Real Estate? Real Estate is the right to land and its permanent structures.
What are Rights? Rights are claims or demands that the government is obligated to enforce; these
are non-revocable and enduring.
1. Personal Rights: these are rights laid out by the constitution.
2. Property Rights: these are “rights to things”, and are derived from legal tradition. There are
three fundamental rights to property:
● Exclusive possession, meaning you have the right to prevent others from using your own
property.
● Use and enjoyment
● Disposition, meaning you have the right to sell it or get rid of it when you feel you
should. Personal Dimension: what you, as an owner, have rights to. These rights can be
separated.
1. Surface Rights: this is what we actually own: the raw land, improvements TO that land,
and improvements ON that land. There are two different rules for water rights:
● Riparian Rights: you can use as much of the water source as you desire as long as it does not
affect the downstream users.
● Prior Appropriation: the first person to put a water source to beneficial economic use obtains
the rights to that source.
1. Subsurface Rights: this is everything below the surface:
● Mineral Rights
● Rule of Capture
1. Air Rights: this is the rights to the air as high as it is feasible to build.
*Fixtures or permanent structures can get a bit iffy. Fixtures are determined by:
