Real Estate Economics 156

California Real Estate Economics

Chapter 3, Economic Change Analysis

Everybody does forecasting, usually implicit.

The decisions of an enterprise are based on expectations about the future.

The ability of participants to adapt and adjust to change is often what separates success from failure.

Much of what defines success in the real estate market is the ability to read the early warning signals of change and prepare for coming market shifts.

We can benefit by anticipating change, and avoid overextending investments and speculations.

An economic trend is a movement in an constant direction: up, down, sideways.

The trend is your friend.

Charts can help identify trends.

GDP measures the level of output.

Y = C + I + G + NX

I is economic investment, 1/3 of which is real estate related.

Changes in investment drive the business cycle.

Cyclical fluctuations: the level of overall economic activity and performance rises and falls fairly regularly in a relatively long cycle of several years.

The longer-term fluctuations constitute the business cycle.

The cycle has simultaneous expansions and contractions by many economic activities.

A boom is an economy in which there is rapid growth and usually also an increase in prices and interest rates. The psychological climate of a boom is one of high optimism, often greater than justified by the real economy. In the late stages of a boom, speculators are in a state of psychological intoxication. There is an illusion of limitless opportunity for growth.

A recession means a decline of output in an economy.

A recession is designated when GDP falls for two successive quarters.

People expect government to prevent deep depressions.

Government has not prevented recessions, but could employ people during a depression.

Cycle indicators include several real estate variables.

Three types of indicators: coincident, lagging, leading.

Published by the Bureau of Economic Analysis of the U.S. Department of Commerce.

Housing starts (permits) are a leading indicator.

Other indicators: construction spending, new home sales.

Real estate is also in the Consumer Price Index.

Residential rent

Owner’s equivalent rent

Household insurance

Maintenance and repairs