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79 Cards in this Set
- Front
- Back
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Based on Figure 1, when did average housing prices start to decrease recently in the US?
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2007, Quarter 3 = USA
2006, Quarter 2 = GR |
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What do we conclude from Figure 2? Explain.
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Just because the dollar price of a house goes up, it doesn't mean the house is worth more.
You must look at the real housing price index. |
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Are real estate (R.E.) prices stay stable over time?
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No.
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Do R.E. prices always increase?
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No.
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Do R.E. markets behave similarly across regions?
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No.
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Which one is more volatile: the national HPI or the regional HPI? Why?
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Regional. National reduces the variation because it considers different regions.
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How have housing prices changed in the US in the past 1 year, 5 years, and since 1991?
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a) -3%
b) -8% c) 90% |
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How have US housing prices kept up with inflation over the past year, 5 years, and since 1991?
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a) 1%
b) 10.8% c) 61.9% |
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How have Michigan's home prices changed relative to the US average over the past year, 5 years, and since 1991?
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a) -3.5%
b) -26.8% c) 48.6% |
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What can we conclude from Figure 3? What explains the relationship depicted there?
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Willingness to pay for housing demands on benefits (future housing price, the benefits from owning the house, rents gained or saved, accessibility to places, etc.) but also the costs (taxes, insurance, maintenance, interest on mortgage financing) --> as interest rates go down --> cost of financing go down --> willingness to pay go up
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real housing prices declined
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first-half of 1980s
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housing prices recovered
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2nd-half of 1980s
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housing prices relatively stable
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1990s
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increasing housing prices
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end of 1990s
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boom (housing prices and sales rising)
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2001-05
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housing prices stable; sales declining
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2006
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decline in housing prices and sales
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2007
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further decline in housing prices and sales
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2008/2009
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low home sales, home prices slightly decreasing
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2010
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home sales and prices increasing or stable in most markets
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2011
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In particular, what is the typical relationship between housing prices and long-term interest rate?
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Interest Rates Increase, Prices Increase
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In particular, what is the typical relationship between housing prices and economic growth?
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Economic Growth Increase, Housing Prices Increase
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In particular, what is the typical relationship between housing prices and the unemployment rate?
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Unemployment Rate Increases, Housing Prices Decrease
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In particular, what is the typical relationship between housing prices and credit availability?
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Credit Availability Increases, Housing Prices Increases
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In particular, what is the typical relationship between housing prices and construction activity?
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Construction Activity Increases, Housing Prices Decrease
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What is R.E.?
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Land + structure
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What are the 7 uses of R.E.?
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1. Farming
2. Preservation 3. Housing 4. Retail 5. Industrial 6. Military bases 7. Infrastructure |
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How important is R.E. to the U.S. economy?
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9 trillion (56% of national wealth)
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What is the difference between demand of R.E. space and asset?
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Demand for R.E. space is for use
Demand for R.E. asset is for ownership |
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when the curve shifts
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change in demand
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when you move along the demand line
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change in quantity demanded
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A supply curve of all R.E. _____ does not exist in reality because R.E. _____ is not homogenous in quality.
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space
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Price elasticity of supply: percentage change in _______ _______ caused by a one percent change in _____
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quantity supplied; price
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The supply of R.E. is (almost) perfectly inelastic in the short-run. Why?
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Limited amount of materials
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Long run production horizon: time period where all inputs in the production of a good becomes ________
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variable
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What determines the long run supply of R.E. space?
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Supply curve is determined by the MC of construction
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How price-elasticity is the supply of R.E. in the long run?
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- Resource availability
- Government construction/ land use regulation - Credit availability |
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How is rent determined in the space market?
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Rent is the price of using space
Determined by supply and demand interaction (assuming a competitive market) |
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When demand for space changes, why are short-run changes in rent much larger than long-run changes?
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Supply is more inelastic, in the long run you build more houses
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What determines the demand for R.E. space?
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1. Population changes
2. Income changes 3. Technology changes 4. Demographical changes 5. Production changes 6. Relative price changes 7. Taste changes |
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When there is an increase in the demand for space, the Dspace curve shifts to the ________.
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right
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What is the net return (r) from the ownership of a R.E. asset?
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Benefit of using it
Capital gains Tax advantages minus ownership costs |
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What is the capitalization rate (cap rate)?
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Net return / value
Rate of current net return |
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What determines the value of an asset?
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Sum of future returns, discounted to present value
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Why $1,000 in the future is worth less than $1,000 today?
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Inflation losses
Risk of death Implicit opportunity cost |
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sum of future returns, discounted to present value
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value
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potential returns from investments, or potential value of current consumption
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implicit opportunity cost
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3 Variables that can change value?
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1. Discount rate
2. Expected returns 3. Risk of changes in returns |
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If a R.E. property generates a net rent of $10,000 per year and it can be sold for a net value of $200,000, what is the cap. rate for this property?
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10,000/200,000 = 5%
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Trade won't happen
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price greater than value
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price is bid up by the competition as potential buyers realize potential gain
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price is less than value
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R.E. properties in a neighborhood are all similar in quality and have a cap. rate of 4%. A house in the neighborhood generates a net rent of $10,000 per year. How much should the net price of this house be? Explain why this is true only in a competitive market.
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10,000 / .04 = 250,000
Competition --> opportunity to profit from trades --> bids up prices of each unit to be equal to the price of other similar units |
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price of using money for a long term
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long-run interest rate
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More money will flow into the long run credit market as long as the marginal benefit of lending money is ________ than the cost of doing so
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greater
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What is the long run MB of lending money?
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Return (interests)
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What is the 3 long run MC's of lending money?
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Implicit opp. costs
Risk of default Expected inflation loss |
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inflation + productivity rate + risk premium
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long-run interest rate
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As inflation decreased in the 1980s, iLR ________________.
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decreased
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Threat of low world economic growth beyond 2001, iLR _____________.
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decreased
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In practice, the long-term Treasury rate is often used as a proxy for the iLR. This approximation works because the rate of returns that the government has to pay to attract Treasury security buyers must be _____________ rate of return from investments in production (adjusted for risks), otherwise investors would put their money in production. In reality, because investing in Treasury security is "riskless" (as long as investors trust the US government), the Treasury rate is slightly ________ than the expected productivity rate of the economy.
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greater than or equal to the; lower
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In a competitive market: cap. rate is almost equal to iLR. Why?
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By arbitrage, this rate of return has to be the same as the return from other investments in the economy
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Consider a competitive market. If a house can be sold for a net price of $150,000 and the net annual long-run interest rate is 4%, what should be the net annual rent over time?
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0.04 x 150,000 = 20,000
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Consider a competitive market. If a house generates a net rent of $600 per month and the net annual long-run interest rate is 5%, what is approximately the net value of the house? To simplify, assume that both the net rent and the interest rate are constant over time. Explain the logic behind this result.
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(12 x 600) / 0.05 = $144,000
The return from owning the house must at least equal the returns from other investments |
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changes due to changes in taxes, insurance, maintenance, fees, etc.
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ownership costs
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3 Variables that change cap. rate?
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1. iLR changes
2. changes in R.E. investment risk 3. change in expectations on future rents |
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ARM involves more risk to the borrower because ________________________ but has one advantage, which is ____________________________.
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uncertain future rates; initial payments are lower
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To the lender, on one hand an ARM offers less risk because _____________________________ but more risk because __________________. Therefore, the average rate of an ARM over the life of the mortgage should be close to the FRM rate.
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rate can be adjusted to inflation changes; risk of default
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Under perfect competition, the long run supply curve equals the long run _______________ curve.
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MC of construction
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5 Variables that affect long-run MC of construction curve?
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1. Cost of building material
2. Cost of land 3. Cost of labor 4. Strictness of construction regulations 5. Short term credit |
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price of getting money in the short term
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iSR
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How is the iSR determined in the economy?
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Controlled by monetary policy decided by the Feds
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Why would Fed want to lower iSR?
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To stimulate consumption and investment (by lowering the cost of getting credit) during recessions
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Why would Feds want to raise iSR?
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To stop inflation pressures during booms (times of increasing aggregate demand)
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iLR is determined by _________________________.
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inflation + productivity rate + risk premium
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iSR is determined by _____________________________.
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price of getting money in the short term
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In the R.E. market, the iLR affects the ___________________________ because buyers of R.E. assets incur long term opportunity costs or long term financing costs.
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decision to own or purchase assets
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In the R.E. market, the iSR affects the __________________ because R.E. developers need short-run credit.
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decision to own or build
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refers to the quantity of space available for sale
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"stock"
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sum of construction over time minus retired space
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stock
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