REAL ESTATE economicsL U M B L E A U R E A L E S T A T E S C H O O L

LUMBLEAU REAL ESTATE SCHOOLReal Estate Economics – First Edition, 2017©2017 by Derf V. FredericksISBN 978-15-3481-932-0All Rights Reserved.

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ContentsAcknowledgments ����������������������������������������������������������������������������������������������������������������������������ivPreface ������������������������������������������������������������������������������������������������������������������������������������������������vChapter 1: ������������������������������������������������������������������������������������������������������������������������������������������� 1Economics 101 ������������������������������������������������������������������������������������������������������������������������������������ 1Learning Objectives ..........................................................................................................................................................................................1Microeconomics and Macroeconomics ....................................................................................................................................................2The Supply and Demand Seesaw ...............................................................................................................................................................3Real Estate Economics – Supply, Demand, and Market Prices ....................................................................................................... 4A 50-Year Snapshot of Median Home Prices Nationally .................................................................................................................. 4The Credit Crisis Housing Demand and Supply Case Study .......................................................................................................................................................................................................... 6The Terms of Economics ................................................................................................................................................................................7Communist Manifesto .................................................................................................................................................................................. 12Chapter Summary ........................................................................................................................................................................................... 14Glossary ............................................................................................................................................................................................................. 16Chapter 1 Quiz .................................................................................................................................................................................................20

Chapter 2: History of Money from Gold to Fiat and Digital ����������������������������������������������������� 27Learning Objectives ...................................................................................................................................................................................... 27The Origins of Money ................................................................................................................................................................................... 28Fiat Currency (Domestic and International) and the Petrodollar ...............................................................................................30Plastic and Digital Money............................................................................................................................................................................34Barter - An Exchange of Goods, Services, and Ideas .....................................................................................................................36The Early Years of Barter ...........................................................................................................................................................................36Advantages and Disadvantages of Barter Systems .........................................................................................................................39Older History of Money and Barter ....................................................................................................................................................... 40Chapter Summary ..........................................................................................................................................................................................44Glossary .............................................................................................................................................................................................................46Chapter 2 Quiz ................................................................................................................................................................................................48

Chapter 3: interest Rate Cycles ���������������������������������������������������������������������������������������������������� 55Learning Objectives ...................................................................................................................................................................................... 55The Bond Market, Interest Rates, and Real Estate ...........................................................................................................................56Interest Rate Histories .................................................................................................................................................................................58Falling Treasuries ............................................................................................................................................................................................60Forecasting Future Interest Rate Trends .............................................................................................................................................60Origins of Interest Rates ..............................................................................................................................................................................66Lending, Livestock, and Wealth Creation .............................................................................................................................................66Unit Fraction ...................................................................................................................................................................................................68Key Dates in Interest Rate History ...........................................................................................................................................................68U.S. Rates and the Federal Reserve ........................................................................................................................................................68From High to Low Rates…... .......................................................................................................................................................................69How Near Zero and Negative Rates Destroy Wealth .......................................................................................................................70Chapter Summary .......................................................................................................................................................................................... 74Glossary ............................................................................................................................................................................................................. 76Chapter 3 Quiz ................................................................................................................................................................................................ 78

Chapter 4: How Capital Drives Housing Markets����������������������������������������������������������������������� 85Learning Objectives ......................................................................................................................................................................................85Conventional and Non-Conventional Capital Access .......................................................................................................................86Private and Non-Banking Money Sources ............................................................................................................................................88

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The Cost of Money and Capital ................................................................................................................................................................90Key Benchmark Interest Rates for Mortgages and Other Loans .................................................................................................90 Key Prime Rate History Dates ....................................................................................................................................................................91The Federal Reserve and Capital Markets ............................................................................................................................................92Alternate Capital Sources ...........................................................................................................................................................................94“Subject To” Purchase Deals ....................................................................................................................................................................95Garn-St. Germain Act: 12 U.S. Code § 1701j–3 - .................................................................................................................................98Preemption of due-on-sale prohibitions ...............................................................................................................................................98All Inclusive Deeds of Trust (AITD) ........................................................................................................................................................ 101Land Contracts (or Contracts for Deed) ........................................................................................................................................... 102Chapter Summary ........................................................................................................................................................................................ 104Glossary ........................................................................................................................................................................................................... 106Chapter 4 Quiz .............................................................................................................................................................................................. 108

Chapter 5: Stagflation, Deflation, Inflation, and Hyperinflation ��������������������������������������������115Learning Objectives ......................................................................................................................................................................................115Inflation’s Negative and Positive Impacts.............................................................................................................................................116Inflation Measurements and Theories ....................................................................................................................................................119Inflation Measurements ..............................................................................................................................................................................122Inflation and Compounded Positive Returns .....................................................................................................................................123Staggering Investment Returns for a Lender or Investor ............................................................................................................124Inflation .............................................................................................................................................................................................................126How accurate are inflation rates? ...........................................................................................................................................................126Income is lacking behind rents ............................................................................................................................................................... 13010 Pricey Real Estate Regions ..................................................................................................................................................................1312017 Consumer Price Inflation Rates by Nation ................................................................................................................................132Chapter Summary ........................................................................................................................................................................................ 134Glossary ............................................................................................................................................................................................................136Chapter 5 Quiz ...............................................................................................................................................................................................138

Chapter 6: Boom and Bust Cycles – California, USA, and international �������������������������������145Learning Objectives .................................................................................................................................................................................... 145California’s Demographics and Home Price Trends ........................................................................................................................ 146California Demographics ............................................................................................................................................................................147Historical Median Home Prices in California ...................................................................................................................................... 148California’s Shadow Inventory and Foreclosure Crisis ................................................................................................................... 148Top 20 National Foreclosure Percentages by California Metro Region (2011) .......................................................................151Decreasing Supply of California Homes ...............................................................................................................................................152National and International Reasons for California and U.S. Down Cycles ...............................................................................152Access to Capital...........................................................................................................................................................................................155Famous Inflationary Time Periods ..........................................................................................................................................................155Weimar Republic (1918 - 1923+) ..............................................................................................................................................................155Greece – 1944 .................................................................................................................................................................................................159Hungary 1946 ................................................................................................................................................................................................. 160Yugoslavia 1994 ........................................................................................................................................................................................... 160Zimbabwe 2008 .......................................................................................................................................................................................... 160Chapter Summary .........................................................................................................................................................................................161Glossary ............................................................................................................................................................................................................162Chapter 6 Quiz .............................................................................................................................................................................................. 164

Chapter 7: Credit Crisis vs� the Great Depression ���������������������������������������������������������������������171Learning Objectives ......................................................................................................................................................................................171The Great Depression (1929 – 1939) ......................................................................................................................................................172Dow Jones Averages – Black Monday (Oct. 28th) and Black Tuesday (Oct. 29th) ............................................................175The Credit Crisis (2007 onward).............................................................................................................................................................176

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The Credit Crisis: Cause and Effects......................................................................................................................................................183Crisis Bailouts and Opportunities .......................................................................................................................................................... 189Great Depression Bailouts and Opportunities ................................................................................................................................. 189The Credit Crisis Bailouts .......................................................................................................................................................................... 190Chapter Summary .........................................................................................................................................................................................192Glossary ........................................................................................................................................................................................................... 194Chapter 7 quiz ............................................................................................................................................................................................... 196

Chapter 8: Population & Migration ��������������������������������������������������������������������������������������������203Learning Objectives ................................................................................................................................................................................... 203Population Trends: The Early Years......................................................................................................................................................204The Industrial Revolution Migration Boom ........................................................................................................................................204The Top 20 Most Populous U.S. Cities in 1900 ............................................................................................................................... 205Historical Urban and Rural Population Percentages ..................................................................................................................... 206National Migration and Population Trends (20th and 21st Century) .......................................................................................... 206Three Key Migration Trends ................................................................................................................................................................... 207Top 20 Largest U.S. Cities: ..................................................................................................................................................................... 207Popular Immigrant Destinations Nationwide ................................................................................................................................... 207California Migration and Population Trends ..................................................................................................................................... 209Population Changes and Growth Rates (Southern California Counties – 2013) ................................................................. 209Population Changes and Growth Rates (Northern California Counties – 2013) .................................................................. 2102016 Housing Markets ..................................................................................................................................................................................211Top 20 Housing Markets (2016) ..............................................................................................................................................................212Top 20 Housing Markets (2017) ...............................................................................................................................................................212Top 20 Hottest Housing Markets in 2017 .............................................................................................................................................213State and National Population Trends .................................................................................................................................................213National Population Trends - U.S. Census Bureau (January 2016) ........................................................................................... 214California Population Trends - U.S. Census Bureau (January 2016) ..........................................................................................215Income Gaps Worldwide ............................................................................................................................................................................2162017 Poverty Guidelines - 48 Contiguous States and Washington DC ....................................................................................217Global Income Inequalities ................................ ......................................................................................................................................217Chapter Summary .........................................................................................................................................................................................221Glossary ...........................................................................................................................................................................................................222Chapter 8 Quiz ..............................................................................................................................................................................................224

Chapter 9: History of Suburbia in the 20th Century ����������������������������������������������������������������231Learning Objectives .....................................................................................................................................................................................231The Suburbia Evolution - 1940s and 1950s ........................................................................................................................................232Suburbia’s Evolution: The 1950s .............................................................................................................................................................236Suburbia’s Evolution – The 1960s and 1970s .....................................................................................................................................237Skyrocketing Inflation, Interest Rates, and Property Values in the 1970s ..............................................................................242Suburbia’s Evolution - The 1980s and 1990s .....................................................................................................................................245Wraparound Mortgage Example: ...........................................................................................................................................................245Chapter Summary ...................................................................................................................................................................................... 250Glossary ...........................................................................................................................................................................................................252Chapter 9 Quiz ............................................................................................................................................................................................. 254

Chapter 10: Urbanization and the 21st Century ������������������������������������������������������������������������261Learning Objectives .....................................................................................................................................................................................261Urbanization Trends - California .............................................................................................................................................................262California is the #1 Most Urbanized State ...........................................................................................................................................262California’s Megalopolis Regions .......................................................................................................................................................... 264The Top 5 Megalopolis Regions Nationally ........................................................................................................................................265Urbanization Trends – National ..............................................................................................................................................................265The Top Urban Regions ............................................................................................................................................................................ 266Urbanization, Big Data, and Real Estate .............................................................................................................................................267

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Top Online U.S.-Based Search Engines............................................................................................................................................... 268Urbanization Trends – Worldwide ........................................................................................................................................................ 269The World’s Population and Urbanization Trends .......................................................................................................................... 270The Top 10 Most Urban Countries or Areas Globally (2014) ........................................................................................................271The Top 10 Least Urbanized Countries or Areas Globally (2014)...............................................................................................271Top 10 Highest Paying Professions in California ..............................................................................................................................273Average California Commute Time to Work (2009 - 2013).........................................................................................................273Transportation Expenses & the California Economy .....................................................................................................................274About SCAG ...................................................................................................................................................................................................277Gasoline Taxes and Fees in California (Effective July 1, 2019) ..................................................................................................278Average Commute Time Per California County ..............................................................................................................................278Taxes and Fees Paid in California .......................................................................................................................................................... 280State Income Tax Rates ............................................................................................................................................................................ 280Property Taxes ............................................................................................................................................................................................. 280Median Property Taxes Paid in California (2017) ..............................................................................................................................281Other Common Taxes and Fees Paid in California and Elsewhere ...........................................................................................282Chapter Summary ....................................................................................................................................................................................... 284Glossary .......................................................................................................................................................................................................... 286Chapter 10 Quiz ............................................................................................................................................................................................288

Chapter 11: Generational Shifts - Baby Boomers, Generation X, and Millennials ��������������� 295 Learning Objectives ....................................................................................................................................................................................295

Generational Groups .................................................................................................................................................................................. 296National Association of REALTORS® Home Buyer and Selling Trends ................................................................................... 299Generational Shifts, Money, and Debt .................................................................................................................................................300Age Characteristics of Home Buyers (2014 data – NAR) ............................................................................................................300Median Income and Ages for all Homebuyers in 2013 (NAR) ...................................................................................................300Race/Ethnicity for all Home Buyers (NAR) ......................................................................................................................................300Digital Connections & Digital Money ................................................................................................................................................... 302Social Media Statistics for 10 Connected Digital Groups ............................................................................................................ 303Digital Money ................................................................................................................................................................................................ 305Generational Wealth .................................................................................................................................................................................. 307The Unaffordability of Housing for Millennials ................................................................................................................................ 307Wealth Inequality and Increasing Poverty Numbers ........................................................................................................................311Chapter Summary ........................................................................................................................................................................................312Glossary ........................................................................................................................................................................................................... 314Chapter 11 Quiz ...............................................................................................................................................................................................316

Chapter 12: Family Structures and Economics ������������������������������������������������������������������������� 323Learning Objectives ....................................................................................................................................................................................323Family Historical Trends in the U.S. .......................................................................................................................................................324California Household Demographic Trends .......................................................................................................................................328The Income Gap Begins To Widen In California: ............................................................................................................................328Education Gap, Experience, and Income Inequality: .....................................................................................................................328California vs. National Household Income Histories .......................................................................................................................329U.S. Census Bureau – Quick Facts on California (2014 Household Numbers) ......................................................................329California Population Estimates and Future Projections ............................................................................................................. 330Projected California Population Growth Rate by Age Group (2014 – 2019) ..........................................................................331Crisis Opportunities for Real Estate Agents .......................................................................................................................................331Jobs, Wealth, and Agency Opportunities .......................................................................................................................................... 334GDP by Metropolitan Region (2014) ................................................................................................................................................... 334GDP by State (2014) ...................................................................................................................................................................................335How Broken Families Impact Real Estate ......................................................................................................................................... 336Divorce by Age Range and Gender: .....................................................................................................................................................337Declining Marriage and Divorce Numbers..........................................................................................................................................338The History of No-Fault Divorce ............................................................................................................................................................338

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Highest Divorce Rates Worldwide ........................................................................................................................................................ 339Millennials’ Family Disillusionment ....................................................................................................................................................... 339The Digital Family Divide ........................................................................................................................................................................340How the Digital World is Shortening Connections .......................................................................................................................340How the Digital World is Reducing Attachments ...........................................................................................................................341Chapter Summary ...................................................................................................................................................................................... 342Glossary .......................................................................................................................................................................................................... 344Chapter 12 Quiz ............................................................................................................................................................................................ 346

Chapter 13: Governmental Regulations and Agencies ����������������������������������������������������������� 353Learning Objectives ....................................................................................................................................................................................353Regulations Affecting Agents Locally ................................................................................................................................................ 354California Agency Benefits .......................................................................................................................................................................356Veterans’ Financing and Subsidies for California Housing ..........................................................................................................359National Governmental Regulations ....................................................................................................................................................360New changes under the TRID rule: ......................................................................................................................................................360Discrimination, Agents, and Owners .....................................................................................................................................................361CalBRE Real Estate Law ............................................................................................................................................................................3621. Real Estate Law and Subdivided Lands Law .................................................................................................................................3622. Regulations of the Real Estate Commissioner ............................................................................................................................ 3643. Administrative Procedure Act ........................................................................................................................................................... 3654. Pertinent Excerpts from the California Codes ............................................................................................................................ 366Recent California Real Estate Law Changes ......................................................................................................................................367The 29 California Legal Codes ...............................................................................................................................................................367California Constitution – CONS ..............................................................................................................................................................367The Original California Constitution for Individuals in 1849 ........................................................................................................367The California Constitution of 1879 ..................................................................................................................................................... 3681. Business and Professions Code – BPC ............................................................................................................................................ 3702. Civil Code – CIV ........................................................................................................................................................................................3713. Code of Civil Procedures – CCP..........................................................................................................................................................3714. Commercial Code – COM ......................................................................................................................................................................3715. Corporations Code – CORP ..................................................................................................................................................................3716. Education Code – EDC ...........................................................................................................................................................................3717. Elections Code – ELEC ..........................................................................................................................................................................3728. Evidence Code – EVID...........................................................................................................................................................................3729. Family Code – FAM .................................................................................................................................................................................37210. Financial Code – FIN ............................................................................................................................................................................37211. Fish and Game Code – FGC ................................................................................................................................................................37212. Food and Agricultural Code – FAC .................................................................................................................................................37213. Government Code – GOV ...................................................................................................................................................................37214. Harbors and Navigation Code – HNC ............................................................................................................................................37215. Health and Safety Code – HSC .........................................................................................................................................................37216. Insurance Code – INS ...........................................................................................................................................................................37217. Labor Code – LAB ..................................................................................................................................................................................37218. Military and Veterans Code – MVC ..................................................................................................................................................37219. Penal Code – PEN ..................................................................................................................................................................................37220. Probate Code – PROB ........................................................................................................................................................................37321. Public Contract Code - PCC ..............................................................................................................................................................37322. Public Resources Code – PRC ..........................................................................................................................................................37323. Public Utilities Code – PUC ...............................................................................................................................................................37324. Revenue and Taxation Code – RTC ................................................................................................................................................37325. Streets and Highways Code – SHC ................................................................................................................................................37326. Unemployment Insurance Code – UIC ..........................................................................................................................................37327. Vehicle Code – VEH ..............................................................................................................................................................................37328. Water Code - WAT ..............................................................................................................................................................................37329. Welfare and Institutions Code – WIC ............................................................................................................................................373

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Chapter Summary ........................................................................................................................................................................................373Glossary ...........................................................................................................................................................................................................376Chapter 13 Quiz .............................................................................................................................................................................................378

Chapter 14: Basics of Commercial Real Estate ������������������������������������������������������������������������ 385Learning Objectives ....................................................................................................................................................................................385Commercial Real Estate Property Descriptions .............................................................................................................................. 386The Top 10 Rent Growth Markets (May 2015) ...................................................................................................................................387The Top 10 Sales Generating Malls in the USA in 2014 ................................................................................................................. 388The Top 5 Sales Generating Malls Worldwide in 2006 ................................................................................................................. 389Commercial Real Estate - Value Analysis Strategies ..................................................................................................................... 389Commercial Real Estate – Financing Options ....................................................................................................................................391Commercial Loan Term Options.............................................................................................................................................................393Prepayments ..................................................................................................................................................................................................393Commercial Real Estate Trends ............................................................................................................................................................. 394Multi-Family Apartments .........................................................................................................................................................................395Hotels / Motels ..............................................................................................................................................................................................395Office ................................................................................................................................................................................................................397Retail .................................................................................................................................................................................................................397Industrial ......................................................................................................................................................................................................... 398Chapter Summary ....................................................................................................................................................................................... 398Glossary ...........................................................................................................................................................................................................401Chapter 14 Quiz ...........................................................................................................................................................................................404

Chapter 15: Land Use, Zoning, and Development �������������������������������������������������������������������� 411Learning Objectives ......................................................................................................................................................................................411Land Use and Zoning Legal Precedents ..............................................................................................................................................412Standard State Enabling Act and Standard City Planning Enabling Act ................................................................................412Procedural Law vs. Substantive Law .....................................................................................................................................................413Land Use, Zoning, and Development in the United States ..................................................................................................................................................................................... 414Zoning Designation Examples .................................................................................................................................................................415Single-Use Zoning.........................................................................................................................................................................................417Land Use, Zoning, and Development in California ......................................................................................................................... 418Smart Growth and High-Density in California and Elsewhere ...................................................................................................420Steps in the Construction and Development Process .................................................................................................................. 422Restrictive Covenants .............................................................................................................................................................................. 423Steps in the Construction Process ...................................................................................................................................................... 424Phase I: Excavation ..................................................................................................................................................................................... 425Phase 2: Foundation ................................................................................................................................................................................. 425Phase 3: Framing ........................................................................................................................................................................................ 426Phase 4: Rough Mechanics .................................................................................................................................................................... 426Phase 5: Drywall .......................................................................................................................................................................................... 426Phase 6: Finish ............................................................................................................................................................................................. 426California Building Codes ....................................................................................................................................................................... 426Popular Home Styles in California ....................................................................................................................................................... 428Chapter Summary .......................................................................................................................................................................................430Glossary .......................................................................................................................................................................................................... 432Chapter 15 Quiz ............................................................................................................................................................................................ 436

Glossary ����������������������������������������������������������������������������������������������������������������������������������������443100-Question Practice Test ��������������������������������������������������������������������������������������������������������� 474Quiz Answers ��������������������������������������������������������������������������������������������������������������������������������489100-Question Practice Test Answers ������������������������������������������������������������������������������������������491About the Authors������������������������������������������������������������������������������������������������������������������������492