Real Estate Finance & Investments, 16e (Brueggeman)
Chapter 7 Single-Family Housing: Pricing, Investment, and Tax Considerations
1) If the cost of rental housing increases relative to house prices, demand for purchased housing
tends to increase.
2) If mortgage interest rates increase, demand for purchased housing tends to increase.
3) Cluster analysis using location quotients and/or employment multipliers provides a snapshot
of employment at a point in time but does not provide a forecast of future employment in a
specific industry.
4) One concern of appraisers when using the sales comparison approach is that financing benefits
paid for by a seller of a property may result in a selling price for the comparable property that is
lower than the market value.
5) A housing bubble occurs when there is a big increase in the supply of homes.
6) Use of construction costs is very important in the sales comparison approach to valuation.
7) Mortgage interest and property taxes are deductible for federal income tax purposes for
homeowners.
8) When the value of public goods exceeds their cost, the effect on house prices is called the
“capitalization effect.”
9) Population increases are usually associated with increases in demand and house price
appreciation.
10) It is likely that two identical houses located in different school districts will sell for different
prices.
11) Estimating the land value for an improved property cannot be accomplished using the sales
comparison method of valuation.
12) When using the cost approach to valuation, current market data for land values must be
obtained.
13) The appraisal function is purely objective; an appraiser’s judgment is not part of the decision
process.
14) Residential appraisers use only the sales comparison approach to determine value of the
homes they appraise.
15) Housing futures contracts allow investors to speculate on changes in home prices without
actually owning a home.
16) A location quotient is the ratio of total employment to base employment.
17) Comparable properties must be chosen from those homes that have been sold, or have been
listed for sale, most recently and that are located in the same city as the subject property.
18) Potential investors, in analyzing the profit potential for a distressed property, generally
consider a financial framework including the acquisition phase, the holding period phase and the
disposition phase.
19) Assume that houses in an area appreciate at the rate of 4 percent a year. A borrower expects
to have a loan-to-value ratio of 90 percent. What is the approximate expected appreciation rate
on home equity (EAHE)?
A) 4.0%
B) 10%
C) 20%
D) 40%
20) Which of the following statements best describes the “wealth effect”?
A) Households with equity in their houses are wealthier than households that rent their housing
B) Expected appreciation in assets, such as home equity, may increase spending on other goods
and services in the economy
C) Economists believe that wealthier households have a positive effect on the housing market,
while low-income households have a negative effect
D) A 10 percent increase in homeownership is associated with a 12 percent increase in economic
growth
21) A property is purchased for $200,000 with an 80 percent LTV. After five years, the owner’s
equity is $80,000. What would be the approximate annual expected appreciation rate on home
equity (annual EAHE)?
A) 13.9%
B) 14.9%
C) 20.0%
D) 80.0%
E) 100%
22) A region has a location quotient of 0.5 for manufacturing. This means that: (B)
A) The region’s share of employment in manufacturing is twice as big as the share of
manufacturing employment in the U.S.
B) The region’s share of employment in manufacturing is half as big as the share of
manufacturing employment in the U.S.
C) Manufacturing is a “base” or “driver” industry for the region
D) Both A and C
E) Both B and C
23) The capitalization effect:
A) Is one of the major factors leading to housing bubbles
B) Has no impact on housing prices
C) Relates the quality of public services that individuals receive relative to the taxes that are paid
for the services
D) Relates the interest rate on mortgage loans to the value of residential real estate
24) The objective of appraisal is to:
A) Establish the highest possible price that a property can sell for
B) Establish the most probable price that would be paid for a property under competitive market
conditions
C) Establish the market value for a property’s land without any structures (such as a house)
D) Establish the market value for a property if the property is put to its highest and best use
25) An appraisal usually contains three approaches to valuation. Which of the following is NOT
one of those approaches?
A) The Market Approach
B) The Ratio Approach
C) The Cost Approach
D) The Income Approach
26) The subject property of an appraisal has only two bedrooms, but one of the comparables used
in the appraisal has three. If the adjustment for a third bedroom is $5,000, the adjustment would
be:
A) A $5,000 increase to the comparable’s selling price
B) A $5,000 decrease to the comparable’s selling price
C) A $5,000 increase to the subject’s selling price
D) A $5,000 decrease to the subject’s selling price
27) The appraised value of a property usually represents the:
A) Actual value of the property
B) Actual selling price of the property
C) Actual opinion of an appraiser
D) Actual replacement value of the property
28) When considering the federal income tax treatment for housing, which of the following is tax
deductible?
A) Mortgage principle and interest paid
B) Mortgage interest paid
C) Homeowner’s insurance paid
D) Mortgage principal paid
29) When calculating taxes, the difference between the acquisition cost and selling price of a
house is called:
A) Ordinary income
B) Amortization
C) Capital gain
D) Deferred income
30) Which of the following would NOT result in an increase in housing demand?
A) Population growth
B) Employment growth
C) Higher interest rates
D) Higher household income
31) The influence on property values brought about by a net benefit related to the value of public
goods less their cost is referred to as:
A) A capital gain
B) A capital loss
C) The capitalization effect
D) The depreciation effect
32) When a homeowner improves some aspect of his property far in excess of comparable
properties in the neighborhood, he is said to have:
A) Under-improved the property
B) Over-improved the property
C) Reached the point of increasing returns
D) Exceeded the breakeven point
33) Federal income tax policy has generally been thought to:
A) Discourage homeownership
B) Encourage renting
C) Increase interest rates
D) Encourage homeownership
34) Which of the following is NOT tax deductible for homeowners?
A) Points in mortgage loans
B) Mortgage interest
C) Property taxes
D) Maintenance expenses
35) A home sales transaction in which the seller was not under undue pressure to sell for a
discounted price (e.g., foreclosure, selling to family member, etc.) is referred to as a(an):
A) Aboveboard transaction
B) Arm’s-length transaction
C) Parsed transaction
D) Tainted transaction
36) Which of the following is NOT a factor in causing a property to become distressed:
A) Borrower’s personal debts
B) Delinquent property taxes
C) Delinquent homeowner’s insurance bill
D) Borrower’s inability to make mortgage payments