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2-4 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 2. THE MONEY MARKET THE FLOW OF MONEY
The real estate financing occurs through a process called the flow of the money. The production of goods and services requires that money be paid for the use of labor, raw materials, management, and capital as illustrated in Figure 2–1. This money is called personal income, and all or some of it may be taxed, spent on goods and services, or saved. That which is saved is usually deposited in financial intermediaries, which, in turn, pump funds back into production. Figure 2–1 is a simplified model of how savings accumulate to become the reservoir for future loans. Carefully trace this circular flow until you understand that individuals “own” land, labor, capital, and management (the supply components), and businesses need these supply components to produce. Thus, businesses “buy” land, labor, and capital from individuals, thereby giving individuals income in the form of wages, rents, interest, and profits. This personal income is then taxed, spent, or saved. That which is saved becomes capital for borrowing. Figure 2–1: The Flow of National Economy Dynasty School (www.dynastySchool.com) 2-5 REAL ESTATE FINANCE INTERMEDIATION AND DISINTERMEDIATION
Whenever institutional lenders (to be discussed in Chapter 3), or any lenders who accumulate funds from outside sources are discussed, two important terms must be understood. One is intermediation, the term used for the gathering of funds by a lender
2-6 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 2. THE MONEY MARKET
and then the lending or supplying of the funds to a borrower. Thus, the lender is serving as an intermediary, or go–between, between persons with funds and the person who needs funds. As we shall see in this chapter, this process is very important to the real estate industry. The opposite of intermediation...
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- Spring '10