ECONOMIC TRENDS AFFECTING REAL ESTATE VALUE

ECONOMIC TRENDS AFFECTING REAL ESTATE VALUE

Regional, National and Global Economics

Property values increase, decrease, or remain stable based on the interaction of the four forces influencing
value. Appraisers must examine and evaluate these forces.

Economic trends and forces at higher levels (regional, national and international) affect property values at the
local level. The real estate appraiser must recognize that the general pattern of statistical analysis that guides in
interpreting value influences on a national level should be used in the general analysis of state and regional
forces which in turn influence local property values.

An appraiser should follow national and regional economic trends, changes in national income levels,
international developments and government financing policies because as recent events have shown the greater
the severity and duration of any economic swing, the wider and deeper is its influence. Conditions to be
observed include: gross national product; balance of payments to other countries; national income levels;
employment; price level indexes; interest rates; fiscal and monetary policies; building starts; and credit
availability.

Factors Influencing City Growth and Development

An appraiser is constantly concerned with the conditions and prospects of the local economy because the value
of local real estate is largely determined by the health of the community, as measured by household purchasing
power, population changes, employment diversification and stability, wage and price levels, and area growth
potential, including environmental conditions.

Cities are classified generally by the functions that stimulate and determine their potential and growth. These
classifications are:

Commercial. Primary source of revenue stems from commercial enterprises. These are usually farming cities,
cities located at railroad terminals or on ocean ports.

Industrial. Primary source of revenue is derived from manufacturing and processing of commodities.

Extractive industry. Primary source of revenue comes from natural resources, e.g., mining, fishing and lumber.

Political. Primary source of revenue is government employment.

Recreation and health. Primary source of revenue comes from tourist trade, vacation and health resorts.

Education. The anchor point of these cities is a college or university.

Population Trends

Because of the direct relationship existing between the value of real property and population growth, the
appraiser should be concerned with population trends and other demographic factors affecting local population,
such as: opportunities for employment; quality of local government; civic and social conditions; demand for
goods and services; transportation and living conditions; and, opportunities for education and personal
improvement.

Neighborhood Analysis

A neighborhood may be defined as a group of similar land uses which are similarly affected by the operation of
the four forces influencing value: utility, scarcity, demand(desire) and transferability. A common definition for
a neighborhood is a grouping together of individuals within the community for similar purposes and interests,
whether the reasons be commercial, industrial, residential, cultural or civic. The life cycle of a neighborhood
includes growth in desirability, peak desirability, stability for a time, then deterioration. The cycle then tends to
turn again as the neighborhood becomes more desirable due to change in use or renewal.

Neighborhood analysis is important because the neighborhood is the setting for the property to be appraised and
the property has value, to a large extent, as it contributes to or detracts from the neighborhood.

A neighborhood tends to be a somewhat self-contained community, frequently defined by physical boundaries
such as hills, freeways, or major streets and usually with some sense of community. In urban areas, the
neighborhood tends to become somewhat blurred due to modern transportation and area-wide cultural,
educational, recreational, and commercial services. In analyzing the “neighborhood” of the parcel to be
appraised, a good starting point is to ascertain the community identity and boundaries.

After defining, even in vague terms, this community identity, an appraiser will look to common services and
features, such as local shopping, street patterns, zoning boundaries, and cultural, religious, educational and
recreational services. In short, an appraiser searches the local area by observation and through government and
public utility investigation to find the factors most affecting use and value patterns in the area.

Neighborhood analysis also tends to define the best search area for comparable market data. As the appraisal
progresses, the appraiser may extend or contract this search area.

Some sources of neighborhood data:

1. U.S. Census tract maps and data (local library or vendors).

2. City and county population demographics (planning departments).

3. City, county, and state street and highway systems (city, county and state road/engineering/highway
departments).

4. Local zoning and general planning, including community plans (planning departments).

5. School locations, capacities, policies (local school districts).

6. Public utility services: water, sewer, natural gas, electric power, telephone (local public utility companies
and government agencies).

7. City and county economic statistics (local chambers of commerce).

8. Local tax information (county tax assessor).

9. If pertinent, private wells and septic laws (local health departments); national forest/park laws (local
forestry and park dept.), etc.