Factors Affecting Value: An Overview

A. Social Factors

Social factors represent the demographic and cultural attributes and trends that affect the demand for real estate and buyer preferences.

1. Demographics:

   • Population Size and Growth: Population increase generally raises housing demand and property prices. This relationship can be measured using correlation coefficients.
   • Age Distribution: The average age affects housing types demanded. Younger populations may prefer smaller apartments, while older populations prefer larger, accessible homes.
   • Income Level: Purchasing power determines affordable property types. Regression analysis can analyze the impact of disposable income on property prices.

2. Social and Cultural Patterns:

   • Recreational Facilities: Facilities like golf courses, tennis courts, and cultural centers enhance area attractiveness and property value. This can be measured by comparing property prices in areas with and without these facilities.
   • Culture: Libraries, museums, and theaters enhance property values.
   • Family Focus: Areas with good schools and children’s activities see higher demand for family homes, raising their value.
   • Homeowner Associations: Restrictions can enhance or decrease property value.

B. Economic Factors

Economic factors relate to the availability and cost of money for real estate lending, construction, and investment, as well as the purchasing power of buyers in the real estate market.

1. Local Economy:

   • Growth, Employment, and Wages: Economic growth, employment, and wages impact residential and commercial property values. For example, communities dependent on oil and gas exploration experience property value fluctuations with oil prices. Oil and gas communities have experienced boom and bust cycles, with property values rising during high oil prices and declining when prices decrease.

2. Interest Rates:

   • Long-term interest rates affect residential and commercial construction. Lower interest rates make homeownership more affordable, raising demand for existing and new homes.
   • Mathematical Model: The relationship between interest rates (i) and property value (V) can be expressed as: V = CF / r, where V is property value, CF is net cash flow, and r is the required rate of return, which is affected by market interest rates. Increased interest rates (i) increase the required rate of return (r), decreasing property value (V), and vice versa.

3. Rent:

   • High rents encourage homeownership and new construction, while low rents discourage them.

4. Vacancy Rates:

   • Overbuilding can lead to high vacancy rates, reducing income and commercial property valuations. High vacancy rates in residential rentals mean lower rents or concessions, reducing net income and property valuation.
   • Formula: Vacancy Rate = (Number of Vacant Units / Total Number of Units) * 100

5. Plottage:

   • The potential to combine an economic site with an adjacent site, where the combined value is greater than the separate values, will have a positive effect on value (assemblage increase).

6. Parking Facilities:

   • The availability of sufficient on-site and/or off-site parking will affect the value of commercial and residential properties.

7. Corner Influence:

   • Commercial properties on corners are generally more valuable than those in the middle of the block due to increased visibility to pedestrians and vehicle traffic, and greater signage and window display opportunities. Properties at traffic signals are more valuable. Residential corner lots are subject to more traffic, noise, and less privacy.

C. Political Factors

Political or governmental factors arise from direct and indirect governmental influence and intervention.

1. Taxes:

   • High-tax areas may lead to lower valuations, while low-tax areas may lead to increased demand and higher property valuations.

2. Zoning:

   • Zoning significantly affects property value by determining its permissible use. Zoning that allows a shopping center is likely to result in a higher valuation than zoning for single-family homes. The amount of land zoned for a specific use will also affect value.

3. Rent Control:

   • Controls that limit rent below market forces will limit value.

4. Growth Limitations:

   • Moratoriums on new construction, restrictions on building permits, and high development fees limit new construction, generally resulting in higher rents and values for existing structures and lower valuations for undeveloped land.

5. Environmental Restrictions:

   • Environmental restrictions include limits on development due to endangered species, wetlands, and greenbelt requirements. Environmental legislation is an increasing area of government influence with a significant impact on property values. Environmental restrictions may increase housing development costs by requiring developers to mitigate negative environmental impacts or allocate land for open spaces. Government policy on timber harvesting from national and state lands affects the cost of lumber needed for construction.

6. Building and Health Codes:

   • Building and health codes are based on the state’s police power to protect the health, safety, and welfare of citizens and can add expenses to development.

D. Environmental Factors (Natural and Physical)

Environmental factors represent aspects of the physical environment, whether natural or man-made, that affect value.

1. Location:

   • Location and its relationship to desired amenities and developed and natural assets affect value.

2. Climate:

   • Temperature, wind, rain, and snow influence the attractiveness of areas for recreation and quality of life, thus impacting value.

3. Water:

   • The availability of sufficient and affordable high-quality water plays a role in industrial expansion and housing development.

4. Transportation:

   • The availability of adequate highways, railroads, airports, and public transportation affects value. A new highway allowing quicker access to jobs in a city from a small town can increase property values in the small town. Street conditions, traffic volume, and accessibility also influence property values.

5. View:

   • The view is an important factor. Water views can double property value compared to similar properties without a view.

6. Soil:

   • Soil that can support a structure is more valuable than sites requiring extensive work for development. Recent findings in earthquake-prone areas indicate that certain soil types can liquefy during earthquakes, causing foundation failure and building collapse, especially in multi-story buildings. Soil tests can identify this condition, diminishing the value of properties with such soil.

7. Size and Shape:

   • Larger sites are generally more valuable than smaller sites, but the value is not necessarily proportional to size.