Chapter 26

Front 1

The ability of a city or region to produce a commodity or service that can bring in money from outside its area is called its

Back 1

economic base ( The ability of a region to export goods and services to other regions and receive money in return)

Front 2

Industries that produce goods and services for export are called

Back 2

base, export or primary industries

Front 3

An industry that produces goods or service FOR EXPORT from the region is called a

Back 3

base industry

Front 4

An industry that produces goods and services to sell to sell to LOCAL residents are

Back 4

service industry. Also called filler or secondary industries. This category includes local school systems, supermarkets, doctors, dentists, drugstores and real estate agents.

Front 5

Because land is immovable, the existence of BASE INDUSTRIES is _______________ _____________ to maintaining local real estate values.

Back 5

ABSOLUTELY ESSENTIAL.

* Unless a region or city exports, it will die economically, and the value of local real estate will fall. i.e. abandoned mining towns

Front 6

Before the discovery of mineral riches, land was often worth

Back 6

a few dollars an acre for grazing purposes

Front 7

As a rule, for each additional person employed in a base industry (exportation),

Back 7

another two persons will be employed in local service industries. (SEE PAGE 437)

i.e. If an electronics firm moves into a community and creates 100 new BASE INDUSTRY jobs, opportunities will be created for another 200 persons in jobs such as retail store clerks, restaurant services, gas station operators, gardeners, bankers, doctors, members of local government, etc.

Front 8

Economists agree on three factors that establish criteria for home sales:

Back 8

1.) job growth
2.) low interest rates
3.) rising home prices.

Front 9

100 base industry jobs created by the electronics firm result in 200 service jobs, for a total of 300 new job opportunities in the community. If every 3 jobs require two households (more than one person working in some families) and each household averages 2.9 persons, then 300 jobs will provide income for 200 households containing a total of

Back 9

580 persons. From the standpoint of local government, 580 more people must be supplied with schools, parks, streets, libraries, water, sewage treatment, and police and fire protection.

Unfortunately, the opposite is true.

Front 10

Job growth not only creates demand for new homes but also provides

Back 10

the opportunity to "move up" to better housing as new people are hired and/or one's job improves.

If an industry relocates to another area, the opposite happens.

Front 11

Low interest rates, particularly in the past few years, have enabled

Back 11

more people to qualify for home loans.

Front 12

Low interest rates can also raise prices on existing homes, since

Back 12

the buyer can afford to pay for a more expensive home.

Increasing interest rates have the opposite effect.

Front 13

A rule of thumb is the 6.5 month rule. If a given market has 6.5 months of new housing inventory, prices go ________ or _________. If the housing inventory is less than 6.5 months, prices increase as demand outspaces supply.

Back 13

flat or down.

Front 14

There is no way to accurately anticipate housing markets,

Back 14

whether good or bad

Front 15

In a growing economy, there is more demand for housing as an

Back 15

investment.
Investors with capital to invest have often looked into residential real estate as a hedge(protection against financial loss) against inflation and as an additional source of income.

Front 16

When investors create a high demand, it often results in a

Back 16

"bubble" in housing prices.

Front 17

This HOUSING BUBBLE is an artificially high price in the market, as it is not a real estate increase in demand;

Back 17

it is investors who have created another market.
When this market declines (there are no new investors or "greater fools"), it is precipitous( dangerously steep) decline.
** Investors do no reflect a real estate market increase; they are mere speculators.

Front 18

An increase in supply causing a glut of houses will cause prices to __________ slightly

Back 18

reduce

Front 19

A decrease in demand would cause prices to shift

Back 19

downwards.

Front 20

An Age Distribution chart of the US population shows that people are living longer and

Back 20

1.) holding on to their houses longer or
2.) moving into housing created specially for senior citizens
*In either case, it increases the housing demand

Front 21

The famed WWII and postwar "baby boom" started in

Back 21

1946 and lasted until 1960. In 1960, the number of births began to decline and continued to decline each subsequent year through 1978.

Front 22

In 1986, a tax bill was passed by Congress and signed by the president that made drastic changes in the income tax treatment of real estate. The laws were revised with the ___________________.

Back 22

1997 Taxpayer Relief Act

Front 23

The 1986 Taxpayer Relief Law repealed

Back 23

the long-term capital gain exclusion, repealed accelerated depreciation on real estate, extended minimum depreciation periods from 19 to 27.5 years for residential and to 39 years fir commercial property, and placed tight limits on real estate less attractive from a tax standpoint

Front 24

Since tax treatment is one of the deciding factors in buying investment real estate,

Back 24

these tax changes greatly influence what people can and will pay for a property.

Front 25

In the 1986 tax bill is a tax credit allowed for the rehabilitation of old and historic structures. The intent of Congress is to

Back 25

induce people to renovate rather than tear down older structures.

*There is also a tax credit for those who will own and operate low-income rental housing.

Front 26

The 1997 Taxpayer Relief Act reinstated

Back 26

capital gains and gave huge exclusions from income for sales of personal residences. This should greatly increase commercial real estate activity (to take advantage of lower tax rates) and allow homeowners to trade up or down without penalty, so residential sales are also positively affected.

Front 27

Many young homebuyers have determined that it is cheap or cheaper to buy a new home than to pay rent, with the tax benefits gained in equity and similar monthly payments. This in turn, creates

Back 27

income for real estate agents, home builders, contractors, title companies, attorneys, interior decorators, etc stirring significant economic growth and prosperity.

Front 28

fiscal policy

Back 28

Carried out by the federal government, its use of taxing and spending power to help influence the economy, establishes government programs and increases or decreases taxation to adjust its income.

Front 29

If the government increases taxes,

Back 29

it reduces private income and the consumer cannot spend as much (it lowers the consumer's disposal income).
Therefore, the consumer's money cannot be spread throughout the economy.

Front 30

The economy, then, has to rely on the government infusion of money into the economy to create prosperity through government programs. This creates

Back 30

constant political struggle over government's fiscal policy.

The government, unlike homeowners and consumers, can change its income streams by passing new laws.

Front 31

History has shown us that keeping more money in consumers' pockets (through lower taxes) tends to

Back 31

lead to a more prosperous economy at the grassroots level.
Higher taxes and govt spending to stimulate the economy give Congress, not consumers, control of the outflow. This is why politics is at the root of the government's fiscal policy.

Front 32

The Federal Reserve Board (The governing board of the nation's central bank, through the Federal Reserve Banks)

Back 32

has the ability through monetary policy, to create and destroy money. This is done by any of the following mechanisms:
1.) open-market purchases and sales of Treasury securities
2.) changes in the discount rate charged to banks, and
3.) changes in the reserve requirements of banks.

Omitting a detailed explanation of each of these and going directly to the point: the Federal Reserve can create money.

Front 33

This is useful because in an economy that grows 3% a year,

Back 33

a 3% increase in the money supply is necessary to keep prices from falling.

Front 34

However, since the Federal Reserve can create money, there is the temptation to

Back 34

print more money than needed for economic growth because this new money can be used to buy back Treasury securities that were created to fund the federal deficit.

Front 35

The short-term result of such purchases is to drop interest rates, which benefits

Back 35

the government, businesses, and housing. Unfortunately, the longer-run effect (beyond two years) is more inflation as there is now more money in circulation without a corresponding increase in goods and services to buy, and the value of the dollar decreases.

Front 36

When inflation is apparent, savers become wise and respond by

Back 36

buying equity assets such as real estate to hedge against further inflation and by raising the rate of interest they will accept to compensate for inflation. Thus, any benefits of creating extra money by the Federal Reserve are lost in the long term.

Front 37

A very important influence on real estate activity and prices in the US has been the

Back 37

secondary mortgage market.

Front 38

Before the 1970s, home loan money came mostly from

Back 38

savings and loans, mutual savings banks, commercial banks, and life insurance companies. This tended to keep a lid on real estate prices.

Front 39

With the advent (notable person, thing or event) of the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, and other secondary mortgage market operators

Back 39

raising additional funds through mortgage backed securities. Newly emerging private secondary market provides a place to sell a huge amount of mortgages that a lender does not want to hold until maturity.

Front 40

The four concepts of inflation are

Back 40

-cost-push inflation,
-demand-pull inflation,
-monetary inflation,
- real-cost inflation

Front 41

The increasing cost of inputs necessary to manufacture a product or offer a service results in what is called

Back 41

Cost inflation (Higher prices due to increased costs of labor and supplies.)

i.e. an automobile manufacturer increases the price of cars because labor and materials cost more

Front 42

When buyers bid against each other to buy something that has been offered for sale, _________________ results.

Back 42

demand-pull inflation (higher prices due to buyers bidding against each other.

i.e. Recently, the demand for corn has increased because we now use it for fuel additives. The farmers get higher offers for their product because more people are demanding it.
** This type of inflation has little to do with the actual cost of producing the particular goods or services being sought. Instead, it reflects what buyers feel they would have to pay elsewhere for the same thing.

Front 43

Monetary inflation

Back 43

results from the creation of excessive amounts of money by government.

No parallel increase in goods and services to be purchased with that money
**This monetary inflation may cause a temporary economic stimulus by placing more money in people's hands but the ultimate result may be a reduction in the purchasing power of that money if the rate of monetary inflation exceeds increased supply of goods and services.

Front 44

Real-cost inflation

Back 44

is inflation caused by the increased effort necessary to produce the same quantity of a good or service.

- another definition: Higher prices due to greater effort needed to produce the same product today versus several years ago.

Front 45

The first factor in attracting the buying of homes was the low __________ cost of interest.

Back 45

real (inflation-adjusted)

Front 46

The housing market is an ______________ market.

Back 46

owner-occupant.

Owner-occupants receive the benefits of occupancy and the psychological value of owning their own homes.

Front 47

If you plan to develop or invest in real estate, it is very helpful to watch

Back 47

Federal Reserve statistics so as to better anticipate changes in interest rates.
Although the marketplace is the ultimate decider of interest rates, the actions of the Federal Reserve Board can and do provide a powerful push on rates.

Front 48

To understand the Federal Reserve Board, you need to know that the Board has four objectives for the American economy:

Back 48

1.) high employment
2.) Stable prices
3.) Steady growth in the nation's productive capacity
4.) a stable foreign exchange value for the dollar

Front 49

Week-to-week changes in the results of Federal Reserve monetary policy can be found each Friday in

Back 49

The Wall Street Journal under "Federal Reserve Data"

Front 50

Monetary base

Back 50

This shows the legal reserves of banks at the Federal Reserve plus cash in the hands of the public

Front 51

If monetary base grows faster than the real (inflation-adjusted) rate of growth of the country's gross domestic product (GDP),

Back 51

One can assume that the nation's money supply will soon be expanding at a greater rate than the real gross domestic product. This will cause interest rates to fall and economic growth to be stimulated.
Two years down the road it may turn to inflation, depending on how the Fed deals with credit standards.

Front 52

There are two likely outcome scenarios pending. The first being The Federal Reserve Board must decide whether to expand the money supply in order to buy back the federal deficit which is known as

Back 52

Monetize the debt. (The creation of money by the Federal Reserve to purchase Treasury securities)

Front 53

The second scenario is that Congress will bring about a meaningful reduction in the size of the federal deficit. This would reduce

Back 53

The need of the US Treasury to compete with businesses and home buyers for available loan funds.

With less competition, interest rates will stay low and perhaps fall even lower. This will attract more loan funds. The cost of this attractive scenario is overall fiscal belt tightening: recipients of government spending programs would have to receive less.

Front 54

What was the effect of the Reagan years on inflation? What are the good points? The bad points?

Back 54

The Reagan years slowed inflation and they lowered interest rates, making housing more affordable. They also resulted in a loss of jobs as the economy was restructured.

Front 55

What was the intent of government in passing the Equal Credit Opportunity Act?

Back 55

The purpose of the Equal Credit Opportunity Act is to require lenders to make credit available without regard to sex or marital status.

Front 56

Did the the years Bill Clinton was in office result in a marked change from the years George W. Bush was in office? Why or why not?

Back 56

Clinton attempted to avoid supply-side economics, but the effect did not produce a marked change.

Front 57

What are the advantage and disadvantage of monetizing the federal debt?

Back 57

The advantage is that in the short-run interest rates can be pushed down, which gives the economy a boost. The disadvantage is that inflation will result.

Front 58

If money supply grows slower than real gross national product, would the result be rising prices or falling prices?

Back 58

Rising prices

Front 59

The real estate brokerage business is an example of a

Back 59

secondary industry

Front 60

The existence of base industry

Back 60

is essential to the economic health of a community.

Front 61

The Hartford Manufacturing Company, which was the largest employer in the city of Westview, recently closes its plant in that city. This will probably result in

Back 61

a slow-down in construction of new homes

Front 62

Generally, for every job created by a base industry, there will be created in service industries approximately

Back 62

one job for every two base jobs

Front 63

When there is a sudden increase in the DEMAND for housing in a community, the price of existing housing will

Back 63

rise rapidly, then fall slightly as supply catches up with demand.

Front 64

The increasing cost of inputs necessary to manufacture a product or offer a service results in what is called

Back 64

cost-push inflation

Front 65

Real estate values are NOT effected by the federal government's

Back 65

monetary policies.
Cash flow refers to the number of dollars remaining each year after you rents and pay operating expenses and mortgage payments.

Front 66

Federal tax laws have traditionally allowed owners of investment properties to deduct maintenance costs, operating costs, ad valorem taxes EXCEPT for

Back 66

depreciation on land.

Front 67

Economists agree that there are three factors that establish criteria for home sales:

Back 67

1.)job growth
2.) low interest rates
3.) rising home prices.

Front 68

Which has the greatest effect upon the interest rate an individual must pay for a real estate mortgage loan?

Back 68

FEDERAL governmental borrowing has the greatest effect upon what an individual must pay for real estate mortgage loan.

* keyword: FEDERAL

Front 69

In order to keep prices from falling in an economy that is growing at 4% per year, which of the following adjustments in the money supply is necessary?

Back 69

4% increase. An INCREASE IN THE MONEY SUPPLY EQUAL TO THE RATE OF GROWTH is needed to keep prices from falling in a growing economy.

Front 70

When a government prints more money than is needed for economic growth, the result is a

Back 70

short-term drop in interest rates.

The printing of more money than is needed for economic growth will lead to a short-term drop in interest rates and a long-term increase in inflation.

Front 71

-FHA loan insurance programs
-Income tax deductions for mortgage loan interest and taxes
- VA loan guaranty programs
All made home purchases by persons of modest income easier EXCEPT

Back 71

creation of extra money by the Federal Reserve.

Creation of extra money by the Federal Reserve leads to inflation which makes home purchases by persons of modest income more difficult.

Front 72

The advent of the secondary mortgage market

Back 72

contributed to real estate speculation and inflation in the late 1970s.
All borrowers have been aided by the strong activity of the secondary money market

Front 73

Cost-push inflation is the result of

Back 73

increased manufacturing costs.

Front 74

Demand-pull inflation has little to do with

Back 74

manufacturing costs but heavily results in too much money chasing too few goods

Front 75

Inflation brought on by increased effort necessary to produce the same quantity of a good or service is known as

Back 75

real-cost inflation.

Front 76

The REAL cost of interest is the

Back 76

inflation-ADJUSTED cost

Front 77

In the late 1980s to curb inflation, the monetary growth policy of the Federal Reserve became one of

Back 77

restrained supply. This was a period of restrained monetary growth in order to curb inflation.

Front 78

Expectations about inflation tend to

Back 78

lag actual changes. This is true whether inflation is heating up or cooling down.

Front 79

What is the LEAST demanding of appreciation potential in the ownership of real estate?

Back 79

Owner who occupies a property as a principal residence.

Front 80

Ultimately, interest rates for real estate mortgage loans are determined by the

Back 80

marketplace. The marketplace supply and demand determines the interest rates for real estate mortgage loans.

Front 81

The Federal Reserve Board's objectives for the United States economy incude

Back 81

high employment, stable prices, steady growth and a stable foreign exchange rate.

Front 82

The Federal Reserve Board's influences the national economy by adjusting

Back 82

interest rates on credit cards.

If you are an active investor (i.e. you manage the rentals you own), it is possible to use as much as $25,000 of your losses to offset your other income.

Front 83

The depreciation period for residential real estate is

Back 83

27.5 years.

Investment in and sale of capital assets are taxed at a much lower rate than normal means. This is a great incentive to buy, hold, and develop capital assets.

Front 84

If the government increases taxes

Back 84

it reduces private income and the consumer cannot spend as much ( it lowers the consumer's disposal income)

Front 85

The creation of excessive amounts of money by the government results from

Back 85

the creation of excessive amounts of money by government.