Principle L 9 17

Principle L 9 17 - Lesson 9 A piece of real estate sells...

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Lesson 9 A piece of real estate sells only when a buyer can afford to purchase that property. For nearly all buyers, affording real estate involves taking out a loan. A buyer's ability to obtain a real estate loan depends partly on personal financial circumstances, and partly on local and national economic factors. To help you understand local and national economic factors, we're going to explain real estate cycles, the government's role in the economy, the secondary market, and lenders in the primary market. To a lender, a loan is an investment. The lender makes the loan in expectation of a return on the investment. In addition to repaying the loan, the borrower will pay interest on it, and the interest is the lender's return. Investors require a higher return on risky investments than they do on relatively safe ones. Thus, the higher the risk that a loan won't be repaid, the higher the interest rate the lender will charge. But the interest rate the lender charges will also depend on market forces and real estate cycles. Fluctuations occur in the level of activity in the residential real estate market. At times, there are more people who want to buy homes than there are homes for sale. This is known as a seller's market. At other times, few people are buying, and homes sit on the market for a long time. This is called a buyer's market. These fluctuations in market activity are known as real estate cycles. Sometimes real estate cycles are local, and sometimes they're regional. Real estate cycles follow the basic rule of economics known as the law of supply and demand. Real estate cycles involve the supply of and demand for mortgage funds. The supply of mortgage funds is the money that investors (private, institutional, and governmental) have available to invest in real estate mortgage loans. The demand for mortgage funds depends on the number of people who want to purchase real estate and who also can afford to borrow the money to do so.
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The price of mortgage funds—which affects both supply and demand—is the current market interest rate. A loan's interest rate can be viewed as the price the lender is charging the borrower for the use of the loan funds. Interest is sometimes called "the cost of money." If available funds are plentiful, interest rates tend to be low; if funds are scarce, interest rates tend to rise. A situation in which money is scarce and rates are high is called a tight money market. In a tight money market, a seller may have to finance part of the purchase price to facilitate a sale. It's best for the economy when supply and demand are in balance. However, the demand for mortgage money and its availability are rarely in balance for long. When they are reasonably close, a region's real estate economy can run well. But trouble develops when supply far outstrips demand, or vice versa. Real estate cycles can't be eliminated, but they can be moderated. Extreme highs and
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This note was uploaded on 01/29/2012 for the course REAL 1 taught by Professor Haynes during the Fall '11 term at West Valley.

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Principle L 9 17 - Lesson 9 A piece of real estate sells...

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