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Understand how and why demand occurs and is calculated.

Understand how and why demand occurs and is calculated.

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Stand out demand Stand out demand Presentation Transcript

  • Discovering Real Estate Demand
  • Introduction • D. Scott Smith, CCIM Professor of Real Estate, NAR • Don’t try this at home! Fair Housing, Steering, Blockbusting • No magic bullet theory, only less wrong
  • Discovering Demand “If you want to make money in real estate you have to focus on Demand” – Feb 2012
  • Discovering Demand “RETHINK” Real Estate • Stop thinking supply side • Basic Economic Theory + Behavioral Economics
  • Basic Economic Theory
  • Basic Economic Theory Key Concept of Basic Economic Theory • Economic Sectors Basic + Non Basic Employment • Economic Base Multiplier Total Employment / Basic Employment
  • Basic Economic Theory • Standard Industrial Classification System • Location Quotient Total Industry Local / Total Local Employ _________________________ Nation Industry Total / National Total Employ
  • Basic Economic Theory • Absorption The rate at which supply is reduced over a given time period. Answers the “how” of demand. Otherwise known as supply based market analysis
  • Behavioral Economics
  • Behavioral Economics Key Concepts of Behavioral Economics • Decisions not made inside a bubble • Helps answer the “why” • All decisions are not wealth maximizing decisions
  • Behavioral Economics Example: White Paint vs. Blue Paint
  • Behavioral Economics Non-Monetary Values like • Fairness • Ethics • Culture • Envy • Fear
  • Behavioral Economics Non-Monetary Values • Desire • Policy • Competition • Effort • Motivation
  • Behavioral Economics • Bounded Rationality: Rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make decisions.
  • Behavioral Economics • Heuristics = Hacks Experience-based techniques for problem solving, learning, and discovery that give a solution which is not guaranteed to be optimal. • speed up the process of finding a satisfactory solution via mental shortcuts • ease the cognitive load of making a decision • rule of thumb, an educated guess, an intuitive judgment, stereotyping, or common sense
  • Behavioral Economics • Diminishing Utility Example: More happiness with each beer you drink. After several beers happiness increases but not at the same rate. Last beer has a lower amount of happiness gain. If you continue to consume, you may even cross over into declining happiness, as you get sick.
  • Behavioral Economics Question: Can Money buy happiness? Answer: Yes! (But only up to a certain point )
  • Behavioral Economics • Irrational exuberance Unsustainable investor enthusiasm that drives asset prices up to levels that aren't supported by fundamentals What happens when exuberance occurs?
  • Behavioral Economics • Herding Behavior The tendency for individuals to mimic the actions (rational or irrational) of a larger group. Individually, however, most people would not necessarily make the same choice. • Relative Positioning How you compare to others
  • Behavioral Economics • Loss Aversion the tendency for people to strongly prefer avoiding losses than acquiring gains. Some studies suggest that losses are as much as twice as psychologically powerful as gains • losses loom larger than corresponding gains
  • Behavioral Economics • Example of Loss Aversion • Lets say a deal is going to increase your income by $200. But in order to gain that surplus you have to also go through a loss. So you gain $1,200 from the deal and then you lose $1,000. You are still up $200 but many won’t want to take that deal because they don’t like the feeling they are left with of losing the $1000. And the same thing happens when you introduce probabilities into the equations.
  • Example of Loss Aversion • If you are 90% possible you are going to gain $1,000 and 10% possible you are going to gain $0, the mathematical gain calculate would be $900. Now let’s say you had a comparable deal in which you were only going to gain $800, but it is 100% possible. More people will choose the $800 over the $900 because of loss aversion and risk heuristics.
  • Ultimatum • Proposer • Responder • Strike a deal • You keep the % of the deal you strike But if no deal is made, both get nothing
  • Ultimatum Results • Why didn’t you offer a lower % ? • Define “Fair” • Did you maximize your wealth options? Conventional economics predicts and insists that responder will accept any offer because any above zero increases responders income. And proposer will offer 1%. Behavioral Economics suggest a deal that both can gain from and avoid 100% loss.
  • Discovering Demand Basic Economic Theory + Behavioral Economics= Demand
  • Measuring Demand • How to calculate demand? • Demand Triggers • Demand Matrix
  • Measuring Demand D2 = Hassle Free Emotion Reusable Best overall Affordability Location Demographics Indicators Psychographics
  • Measuring Demand D2= H x E x R x B x A x L x D x I x P “Herbal Dip”
  • Hassel Free • Easy access to property Think poorly designed parking lots • Easy transaction • Think like Apple • Easy negotiation • Connecting all the dots
  • Emotion • Psychology of decision • Neuromarketing • Feel good measures • Social norms • Framing
  • Reuse • Adaptability • Construction management • Development process • All things become new, recycle it
  • Best Overall • Gut Feeling • Heuristics • Ethics & Morals
  • Affordability • Cost + Markup = Price ( > / < ) Market Value • Cost = Raw Materials + Labor ( Cost per sqft + Hourly Wage ) • Markup= Profit (Rate of Return) + Taxes (Corp. or Personal) + Overhead (budget) • Market Value = Comps (Price) / DOM / Growth rate from same DOM prev. • Debt Service Coverage Ratio (Investment)
  • Location • Traffic Count • Visibility • Ingress and Egress • Property Positioning or set backs (physical)
  • Which location is worth more?
  • Demographics • Study of characteristics in an identified market • Hard facts and external realities • Age, Sex, Income, Race, etc. • www.websitehere.com
  • Indicators • Used as a forecast for local and national economies • Demonstrate when an economy expands and contracts • Different indicators will be looked at for different asset or investment types
  • • Employment • Consumer Confidence • CPI • GDP
  • Psychographs • Sensory component • Categorization about how you feel about something. VAL System • The key to understanding what motivates a customer
  • Psychographs • Survey method • Social Interactions • Data Mining Companies • Search Engines
  • VALS System http://www.strategicbusinessinsights.com/vals/surveynew.shtml
  • Innovator •Highest incomes, high self-esteem •Expression of taste •Consumer choices are "finer things” •Image importance
  • Thinkers •High-resource group and idealistic •Mature, well-educated •World views, open to change •Practical consumers and rational decision makers
  • Believers •Conservative and predictable consumers •Favor American products and brands •Focused on family, community, and religion •Modest incomes
  • Achievers •Motivated by achievement and work-oriented •satisfaction from jobs and families •Politically conservative •Respect authority and status quo •Favor established products and services that show off their success to their peers.
  • Strivers •Low-resource group, •Motivated by achievements •Values very similar to achievers •Have fewer economic and social, and resources. •Style is extremely important •Strive to emulate people they admire
  • Experiencers •Median age of 25. •Energy, physical exercise, social activities •Avid consumers, spending on clothing, fast- foods, music, etc. •Emphasis on new products and services
  • Makers •Practical people who value self-sufficiency. •Focused on the familiar-family, work, and physical recreation •Have little interest in the broader world. •Appreciate practical and functional products
  • Survivors •lowest incomes. •few resources •median age of 61 •tend to be brand-loyal consumers
  • Demand Rate Applying Mathematics to Demand
  • Apply a 1 -10 scale D2 = Hassle Free = 6 Emotion = 5 Reusable = 1 Best overall = 9 Affordability = 7 Location = 8 Demographics = 6 Indicators = 5 Psychographics = 4
  • Demand Rate (6+5+1+9+7+8+6+5+4) / 9 = 51 / 9 = 5.6% Demand Rate = 5.6% Compare multiple properties
  • Demand Rate Demand Rate = 5.6% Property A Demand Rate = 4.2% Property B Demand Rate = 8.3% Property C
  • Thank you!
  • Resources •Real Price of Everything •Buyology •Contagious •Behavioral Economics for Dummies •Demand