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Essentialsof Real EstateEconomicsSIXTH EDITION, Dennis J. McKenzieRichard M. BettsMAI, SRA, ASA (Real Estate) Property AnalystCarol A. JensenCabrillo College, Aptos and City College of San Francisco CENGAGEQC3Learning Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States

Brief ContentsPrefacexivAcknowledgmentsAbout the AuthorsDedicationxixxxxxiiPART I BASIC ECONOMIC BACKGROUNDFOR REAL ESTATE ANALYSIS I1INTRODUCTION TO REAL ESTATE ECONOMICS22REVIEW OF THE ECONOMIC PRINCIPLES OF CAPITALISM3GOVERNMENT'S ROLE IN THE ECONOMY4MONEY, CREDIT, AND REAL ESTATE5IMPORTANT ECONOMIC FEATURES OF REAL ESTATE83876116PART II UNDERSTANDING REAL ESTATE MARKETS 1496REGIONAL AND COMMUNITY ANALYSIS1507COMMUNITY GROWTH PATTERNS8NEIGHBORHOODS: CLUSTERS OF LAND USE AND VALUE9HOUSING MARKETS17620423010COMMERCIAL AND INDUSTRIAL MARKETS266I IRURAL AND RECREATIONAL REAL ESTATE MARKETS300iii

Brief ContentsPART I8B MAJOR INFLUENCES O N REAL ESTATE12THE ECONOMICS OF REAL PROPERTY TAXATION13LAND-USE CONTROLS14REAL ESTATE DEVELOPMENT15REQUIRED GOVERNMENT REPORTSPART IV334360388410REAL ESTATE INVESTMENT 42716SUMMARY OF REAL ESTATE INVESTMENT PRINCIPLES 42817INCOME TAX ASPECTS OF INVESTMENT REAL ESTATE18APPLIED REAL ESTATE ECONOMICS19ANTICIPATING CHANGE478496Answers to the Reviewing Your Understanding QuestionsGlossaryIndex534543454529

ContentsPrefacexivAcknowledgmentsAbout the AuthorsDedicationxixxxxxiiPART I BASIC ECONOMIC BACKGROUNDFOR REAL ESTATE ANALYSIS IIINTRODUCTION TO REAL ESTATE ECONOMICS 2WHAT IS ECONOMICS?3WHAT IS REAL ESTATE? 3WHAT IS REAL ESTATE ECONOMICS?4WHAT REAL ESTATE ECONOMICS IS NOT4WHY IS REAL ESTATE ECONOMICS SO INTERESTING?5WHY SHOULD YOU STUDY REAL ESTATE ECONOMICS?A GENERAL OVERVIEWCHAPTER OUTLINESA FINAL WORD766h5

viContentsREVIEW OF THE ECONOMIC PRINCIPLESOF CAPITALISM 82.1 BASIC ECONOMIC CONCEPTS98Economics RevisitedChoice and Opportunity Cost: No Free Lunch Economics Is an Inexact Science Economic Solutions May Contain ValueJudgments The Different Economic Systems Real World Economies No Economic System Is Perfect Basic Principles of Pure Capitalism How Pure Capitalism Answers the Questions What, How, and for Whom Modern Mixed Capitalism in the United States2.2 ECONOMIC PRINCIPLES IN ACTION17The Factors of Production Rent, Wages, Interest, Profit,and Income a The Circular Flow of the Economy2.3 MARKETS AND PRICES 21What Determines Prices and Output? Perfect versus ImperfectMarkets Demand and Supply: The Classic Answer to PriceDetermination Demand Supply Supply and Demand TogetherDetermine Output and Price Levels Elasticity The Flow of theEconomy Revisited Impact of International Trade International TradeConcepts International Trade: Is Self-Sufficiency Better? The EconomicTheory Sounds Good, But .CASE & POINT—ADAM SMITH, ECONOMIC PHILOSOPHER34GOVERNMENT'S ROLE IN THE ECONOMY 383.1 THE REAL WORLD OF MARKETS AND GOVERNMENT39Government Intervention in the Economy How GovernmentEconomic Intervention Changed Flow of the Economy—The GovernmentIncluded3.2 MEASURING THE PERFORMANCE OF THE ECONOMY43National Income Accounting The Details Behind the GDP Totals Other Income Measurements Keeping Up with National Income The Importance of Employment Data Other Economic Data ForeignOwnership of U.S. Businesses and Real Estate Composition of ForeignInvestment3.3 CHANGES IN ECONOMIC ACTIVITY55The Phases of the Business Cycle Causes of BusinessCycles 8 Real Estate Cycles Using Economic Indicators ForecastingChanges in Economic Activity

Contents3.4 GOVERNMENT TOOLS TO FIGHT ECONOMIC PROBLEMS 61Fiscal Policy Monetary Policy 8 The Theory Sounds Good, butThere Are Some Problems Automatic Stabilizers The MeasurementProblemsCASE & POINT—LAFFER CURVE 744 MONEY, CREDIT, AND REAL ESTATE 764.1 THE SUPPLY OF MONEY77What is Money? What Makes "Good" Money? Money TodayCards Are Not Money Depository Institutions Create Money Fractional Reserves Create Money a Federal Deposit Insurance Money Can Cause Inflation and Cause Harm Real Estate Markets The Importance of Controlling the Supply of Money CreditHowToo Muchand Inflation4.2 THE FEDERAL RESERVE SYSTEM 88Purpose and Structure of the Federal Reserve System How the Federal ReserveAttempts to Control the Money Supply Major Tools of the Federal Reserve Federal Funds Rate The LIBOR Rate A Review of the Major FederalReserve Tools4.3 H O W THE ACTIONS OF THE FEDERAL RESERVE AFFECTREAL ESTATE 96Tight-Money Policies and Real Estate Does the Fed Discriminate Against HousingWhen It Tightens Money? Easy-Money Policies and Real Estate Recovery inthe Real Estate Market Normally Precedes a Recovery in the National Economy Mortgage Market Reforms4.4 THE FED'S EMERGENCY POWERS100Trust and Counter-Party Risk The Panic and the Fed's ResponseCASE & POINT—THE SAVINGS AND LOAN CRISIS OF THE 1980sAND ITS SUCCESSOR, THE MORTGAGE SECURITIES COLLAPSEOF 2007 1125IMPORTANT ECONOMIC FEATURESOF REAL ESTATE 1165.1 ECONOMIC CHARACTERISTICS OF REAL ESTATE MARKETS117Does This Mean That the Principles of Supply and Demand Do Not Work in RealEstate Markets?5.2 H O W REAL ESTATE MARKETS REACT TO CHANGES IN DEMAND122What Causes Supply and Demand for Real Estate to Change? Foreign Ownership of U.S. Real Estate Why Have Real Estate Professionals Impact of the Internetvii

Contents5.3 ANALYZING DEMAND AND SUPPLY USING GRAPHS130Demand Supply Equilibrium Why Use Demand andSupply Graphs?CASE & POINT—TAKING DEMAND AND SUPPLY GRAPHSANOTHER STEP 140PART II UNDERSTANDING REAL ESTATE MARKETS 1496REGIONAL AND COMMUNITY ANALYSIS 1506.1 WHY AND WHERE COMMUNITIES FORM1518The History of CommunitiesWhat Determines Community8Location?Reasons for American City Locations How the City'sOrigin Fits In6.2 WHY THE COMMUNITY GROWSThe Community as an Economy86.3 H O W TO STUDY A COMMUNITY156Setting Community Goals163Traditional Community Analysis Basic Employment Reviewed8Regional Economic Studies 8 The Gatekeeping Syndrome8Sources of DataCASE & POINT—"WHERE ARE WE MOVING TO?"173COMMUNITY GROWTH PATTERNS 1767.1 LAND-USE PATTERNS177How Economics Determines Land Use 8 Why Patterns?What Are the Rules? The Noneconomic Factors inLand Use87.2 LOOKING AT THE STRUCTURE OF COMMUNITIES1808Why Study Community Land-Use Patterns?Viewing the Small88CommunitySimple Circles—AccessibilityThe Importance ofTopography Transportation 8 The Existing City: Origins7.3 MODERN CITY GROWTH PATTERNS1868Proximity Versus AccessibilityThe Complex City 8 Enter the Wedge8Political and Social FactorsCommunity Attitudes 8 The Results8Other Views 8 The Effects of Transportation Change 8 Adding inTechnology8CASE & POINT—FUTURE ISSUES IN CITY LAYOUT202

Contents8 NEIGHBORHOODS: CLUSTERS OF LAND USE ANDVALUE 2048.1 THE NEIGHBORHOOD AS THE BASIS OF VALUE205What Is a Neighborhood? Neighborhood, Location, and Property Values8Neighborhood Boundaries8.2 NEIGHBORHOODS AS BAROMETERS OF CHANGE208Forces for Change 8 Signs of Neighborhood Change The Meaning of It All8.3 AS NEIGHBORHOODS AGE216Progressive Decay Wow! What Happened?The Rehabilitation Cycle 8 Learning to Fight Decay8CASE & POINT—NEIGHBORHOOD PRESERVATION:TWO VIEWPOINTS 2289 HOUSING MARKETS 230Housing Markets9.1 THE DEMAND FOR HOUSINGPopulation8231Income and Financing Changes in Taste9.2 THE SUPPLY OF RESIDENTIAL HOUSING244Evaluation of Supply 8 Is the Housing Suitable?Available Supply 8 The Future of Construction89.3 THE GOVERNMENT A N D HOUSINGRegulating Housing Markets8255Encouraging Housing ProductionCASE & POINT—GATED COMMUNITIES—AMERICAN APARTHEID?265I 0 COMMERCIAL AND INDUSTRIAL MARKETS 26610.1 BUSINESS REAL ESTATE267Investors versus Users The User ViewpointThe Investor Viewpoint810.2 MAJOR VALUE INFLUENCESThe Economic Issues8Special Issues8271The Governmental Issues10.3 COMMERCIAL PROPERTY277What Are the Major Forces? 8 What Are the Patterns of Commercial LandUse? 8 Interesting Changes Is Your Local Commercial Area Changing?8Making a Simple Market Surveyix

Contents10.4 INDUSTRIAL PROPERTY289Theory of Industrial Location The Changing Pattern of Industrial Locations8The Industrial Market StudyCASE & POINT—THE REVOLUTION IN RETAILINGI I297RURAL AND RECREATIONAL REAL ESTATEMARKETS 300I I.I FARMLAND MARKETS301Key Factors Major TrendsI 1.2 RURAL HOMES315The New Subdivision The Older Home11.3 TIMBER AND OTHER RESOURCE LANDS321Key Factors Major TrendsCASE & POINT—SHOULD THE GOVERNMENT SUBSIDIZE RESOURCEDEVELOPMENT? 330PART IIIMAJOR INFLUENCES O N REAL ESTATE12 THE ECONOMICS OF REAL PROPERTY12.1 THE PRINCIPLES OF TAXATION335Taxes Can Be Used to Redistribute Wealth The Theory of Taxation8Major Taxes and Expenditures Is the Tax Progressive, Proportional, orRegressive?12.2 EVALUATING THE PROPERTY TAX343Local Government and the Property Tax Who Really Pays the PropertyTax: Owners, Tenants, or Consumers? Property Taxes and CapitalizedReal Estate Values Is the Property Tax Regressive? Property Taxesand Land Usage12.3 PROPERTY TAX REFORM350Political Realities Current ReformsTaxes Affecting Real Estate8Possible Future ReformsCASE & POINT—TAX TALK . SAY WHAT YOU MEAN!3588Other

ContentsI 3 LAND-USE CONTROLS 36013.1 TYPES OF LAND-USE CONTROLSPrivate Land-Use ControlsPower 8 Eminent DomainLand Use8361Easements Public Land-Use Controls 8 PoliceGovernment Spending as an Influence on813.2 PRINCIPLES OF URBAN PLANNING3688Definition of Urban PlanningCreation and Implementation8of Urban PlanningThe Need for Regional Planning13.3 RECENT TRENDS IN LAND-USE CONTROLS374Preventing Premature Subdividing 8 Pollution and EnvironmentalRegulations 8 Slow-Growth and No-Growth Policies 8 The Creationof New Towns State and Federal Intervention in Land-Use Controls8Inclusionary Zoning Land-Use Controls and the Real EstateIndustryCASE & POINT—PROPERTY RIGHTS: T W O VIEWPOINTS385I 4 REAL ESTATE DEVELOPMENT 38814.1 REAL ESTATE CONSTRUCTIONConstruction Activity8389Characteristics of the Homebuilding Industry14.2 THE DEVELOPMENT A N D BUILDING PROCESS394Land Development and Construction 8 When This Process Is Ignored,Overbuilding Can Occur 8 Steps in Construction 8 Green Building 8 TheCost of Construction Delays and Impact FeesCASE & POINT—REAL ESTATE ECONOMIC HISTORY: CALIFORNIA IN THE1980S: "THE BUILD-AND-THEY-SHALL-COME SYNDROME," FOLLOWED BY ADECLINE IN THE I 9 9 0 S - 2 0 0 0 S 4061 5 REQUIRED GOVERNMENT REPORTS 41015.1 TYPES OF REQUIRED GOVERNMENT REPORTS 411Federal Legislation State Legislation Local Legislation15.2 COSTS VERSUS BENEFITS417Defining Costs and Benefits 8 Analyzing the Costs8Analyzing the Benefits 8 The TrendCASE & POINT—HOW WET IS WET?425xi