CHAPTER 1
The Nature of Real Estate and Real Estate Markets
Test Problems
1. A market where tenants negotiate rent and other terms with property owners or their
managers is referred to as a:
2. The market in which required rates of return on available investment opportunities are
determined is referred to as the:
3. The actions of local, state, and federal governments affect real estate values
4. What portion of households owns their house?
5. Of the following asset categories, which class has the greatest aggregate market value?
6. Storm water drainage systems are best described as:
7. What is the single largest asset category in the portfolio of a typical U.S. household?
8. Real estate markets differ from other asset classes by having all of the following
characteristics except:
9. Which of the following is not important to the location of commercial properties?
10. Which of the following attributes of a home are the most difficult to observe and value?
Study Questions
1. The term real estate can be used in three fundamental ways. List these three alternative
uses or definitions.
Solution: Real estate is most commonly defined as land and any improvements made to
or on the land, including fixed structures and infrastructure components. The term is also
2. The U.S. represents about 6 percent of the earth’s land service, or approximately 2.3
billion acres. Who actually owns this land? What is the distribution of this land among
the various uses (e.g., developed land, federal, land, forest land).
Solution: Developed land, consisting of residential, industrial, commercial, and
institutional land, represents approximately 6 percent of the total land in the U.S. Federal
3. Describe the value of U.S. real estate by comparing it to the values of other asset classes
(e.g., stocks, bonds).
Solution: As of 2016, real estate (including owner-occupied housing, but excluding real
estate held by non-real estate corporations) was the second largest asset class in the U.S.,
4. How much of the wealth of a typical U.S. household is tied up in housing? How does this
compare to the role that assets and investments play in the portfolios of U.S. households?
Solution: Housing is the single largest asset in the typical U.S. household’s portfolio,
representing approximately 22 percent of household wealth in 2016. In comparison, the
5. Real estate assets and markets are unique when compared to other assets or markets.
Discuss the primary ways that real estate markets are different from the markets for other
asset that trade in well-developed public markets.
Solution: Real estate is unlike other asset classes because it is heterogeneous and
immobile. Real estate assets have unique and distinctive characteristics, such as age,
building design, and location. Real estate is also immobile; therefore, location is an
6. Explain the role of government in real estate at the federal, state, and local level. Which
has the most significant impact on real estate markets?
Solution: Local government has the most influence on real estate markets. It affects the
supply and cost of real estate through zoning and land use regulations, fees on new land
The Federal government influences real estate through income tax policy, housing
subsidy programs, federal financial reporting requirements, fair housing laws, and
7. Identify and describe the interaction of the three economic sectors that affect real estate
value.
Solution: The three economic sectors that influence real estate value are user markets,
capital markets, and government. In real estate user markets, households and firms
compete for physical location and space. This competition determines who will obtain the
use of a specific property and how much will be paid for the use of this property. Capital
8. Real estate construction is a volatile process determined by the interaction of the user,
capital, and property markets. What signals do real estate producers (i.e., developers) use
to manage this process? What other factors affect the volatility of real estate production?
Solution: When real estate market prices exceed the cost of production, this signals
producers to build, or add additional supply. As the supply of real estate increases relative
