stand out demand
DESCRIPTION
Understand how and why demand occurs and is calculated.TRANSCRIPT
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Discovering Real Estate Demand
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Introduction
• D. Scott Smith, CCIMProfessor of Real Estate, NAR
• Don’t try this at home!Fair Housing, Steering, Blockbusting
• No magic bullet theory, only less wrong
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Discovering Demand
“If you want to make money in real estate you have to focus on Demand” – Feb 2012
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Discovering Demand
“RETHINK” Real Estate
• Stop thinking supply side
• Basic Economic Theory + Behavioral Economics
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Basic Economic Theory
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Basic Economic Theory
Key Concept of Basic Economic Theory
• Economic Sectors Basic + Non Basic Employment
• Economic Base Multiplier Total Employment / Basic Employment
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Basic Economic Theory
• Standard Industrial Classification System
• Location QuotientTotal Industry Local / Total Local Employ _________________________
Nation Industry Total / National Total Employ
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Basic Economic Theory
• AbsorptionThe rate at which supply is reduced over a given time period.
Answers the “how” of demand. Otherwise known as supply based market analysis
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Behavioral Economics
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Behavioral Economics Key Concepts of Behavioral Economics
• Decisions not made inside a bubble
• Helps answer the “why”
• All decisions are not wealth maximizing decisions
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Behavioral Economics
Example:
White Paint vs. Blue Paint
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Behavioral Economics
Non-Monetary Values like
• Fairness• Ethics• Culture• Envy• Fear
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Behavioral Economics
Non-Monetary Values• Desire• Policy• Competition• Effort• Motivation
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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.
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Behavioral Economics
• Heuristics = HacksExperience-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
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Behavioral Economics
• Diminishing UtilityExample: 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.
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Behavioral Economics
Question: Can Money buy happiness?
Answer: Yes! (But only up to a certain point )
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Behavioral Economics
• Irrational exuberanceUnsustainable investor enthusiasm that drives asset prices up to levels that aren't supported by fundamentals
What happens when exuberance occurs?
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Behavioral Economics
• Herding BehaviorThe 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
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Behavioral Economics
• Loss Aversionthe 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
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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.
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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.
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Ultimatum
• Proposer• Responder• Strike a deal • You keep the % of the deal you strike
But if no deal is made, both get nothing
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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.
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Discovering Demand
Basic Economic Theory + Behavioral Economics=
Demand
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Measuring Demand
• How to calculate demand?
• Demand Triggers
• Demand Matrix
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Measuring DemandD2 = Hassle Free
Emotion Reusable Best overall
Affordability Location Demographics Indicators Psychographics
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Measuring Demand
D2= H x E x R x B x A x L x D x I x P
“Herbal Dip”
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Hassel Free• Easy access to property
Think poorly designed parking lots• Easy transaction• Think like Apple • Easy negotiation• Connecting all the dots
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Emotion
• Psychology of decision• Neuromarketing• Feel good measures• Social norms• Framing
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Reuse
• Adaptability• Construction management• Development process• All things become new, recycle it
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Best Overall
• Gut Feeling
• Heuristics
• Ethics & Morals
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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)
D2
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Location
• Traffic Count• Visibility• Ingress and Egress• Property Positioning or set backs (physical)
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Which location is worth more?
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Demographics• Study of characteristics in an
identified market
• Hard facts and external realities
• Age, Sex, Income, Race, etc.• www.websitehere.com
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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
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• Employment• Consumer Confidence• CPI• GDP
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Psychographs• Sensory component
• Categorization about how you feel about something. VAL System
• The key to understanding what motivates a customer
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Psychographs
• Survey method
• Social Interactions
• Data Mining Companies
• Search Engines
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VALS System
http://www.strategicbusinessinsights.com/vals/surveynew.shtml
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Innovator
•Highest incomes, high self-esteem•Expression of taste•Consumer choices are "finer things”•Image importance
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Thinkers
•High-resource group and idealistic•Mature, well-educated •World views, open to change•Practical consumers and rational decision makers
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Believers
•Conservative and predictable consumers •Favor American products and brands•Focused on family, community, and religion •Modest incomes
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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.
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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
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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
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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
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Survivors
•lowest incomes. •few resources •median age of 61 •tend to be brand-loyal consumers
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Demand Rate
Applying Mathematics to Demand
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Apply a 1 -10 scaleD2 = Hassle Free = 6
Emotion = 5 Reusable = 1 Best overall = 9
Affordability = 7 Location = 8 Demographics = 6 Indicators = 5 Psychographics = 4
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Demand Rate
(6+5+1+9+7+8+6+5+4) / 9 = 51 / 9 = 5.6%Demand Rate = 5.6%
Compare multiple properties
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Demand RateDemand Rate = 5.6% Property A
Demand Rate = 4.2% Property B
Demand Rate = 8.3% Property C
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Thank you!
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Resources
• Real Price of Everything
• Buyology
• Contagious
• Behavioral Economics for Dummies
• Demand