Real Estate Finance and Investments

15th Edition Brueggeman Test Bank

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 CHAPTER 7
Single Family Housing: Pricing, Investment, and Tax Considerations

TRUE/FALSE

1. If the cost of rental housing increases relative to house prices, demand for purchased
housing tends to increase. (T)

2. If mortgage interest rates increase, demand for purchased housing tends to increase. (F)

3. Cluster analysis using location quotients and/or employment multipliers provide a snapshot
of employment at a point in time but do not provide a forecast of future employment in a
specific industry. (T)

4. One concern of appraisers when using the sales comparison approach is that financing
benefits paid for by a seller of a property may result in a selling price for the comparable
property that is lower than the market value. (F)

5. A housing bubble occurs when there is a big increase in the supply of homes. (F)

6. Use of construction costs is very important in the sales comparison approach to valuation.
(F)

7. Mortgage interest and property taxes are deductible for federal income tax purposes for
homeowners. (T)

8. When the value of public goods exceeds their cost, the effect on house prices is called the
"capitalization effect." (T)

9. Population increases are usually associated with increases in demand and house price
appreciation. (T)

10. It is possible for two identical houses located in different school districts to sell for different
prices. (T)

11. Estimating the land value for an improved property cannot be accomplished using the sales
comparison method of valuation. (F)

12. When using the cost approach to valuation, current market data for land values must be
obtained. (T)

13. The appraisal function is purely objective; an appraiser's judgment is not part of the decision
process. (F)

14. Residential appraisers use only the sales comparison approach to determine value of the
homes they appraise. (F)

15. Housing futures contracts allow investors to speculate on changes in home prices without
actually owning a home. (T)

16. A location quotient is the ratio of total employment to base employment. (F)

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MULTIPLE CHOICE

17. Assume that houses in an area appreciate at the rate of 4 percent a year. A borrower
expects to have a loan-to-value ratio of 90 percent. What would be the approximate
expected appreciation rate on home equity (EAHE)? (E)

(A) 4.0%
(B) 4.4%
(C) 10%
(D) 20%
(E) 40%

18. Which of the following statements best describes the “wealth effect,” as described in the
textbook? (B)

(A) Households with equity in their houses are wealthier than households that rent their
housing
(B) Expected appreciation in assets, such as home equity, may increase spending on other
goods and services in the economy
(C) Economists believe that wealthier households have a positive effect on the housing
market, while low-income households have negative effect
(D) A 10 percent increase in homeownership is associated with a 12 percent increase in
economic growth

19. A property is purchased for $200,000 with an 80 percent LTV. After five years, the owner’s
equity is $80,000. What would be the approximate annual expected appreciation rate on
home equity (annual EAHE)? (B)

(A) 13.9%
(B) 14.9%
(C) 20.0%
(D) 80.0%
(E) 100%

20. A region has a location quotient of 0.5 for manufacturing. This means that: (B)

(A) The region’s share of employment in manufacturing is twice as big as the share of
manufacturing employment in the U.S
(B) The region’s share of employment in manufacturing is half as big as the share of
manufacturing employment in the U.S
(C) Manufacturing is a “base” or “driver” industry for the region
(D) Both A and C
(E) Both B and C

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21. The capitalization effect: (C)

(A) Is one of the major factors leading to housing bubbles

(B) Has no impact on housing prices
(C) Relates the quality of public services that individuals receive relative to the taxes that are
paid for the services
(D) Relates the interest rate on mortgage loans to the value of residential real estate

22. The objective of appraisal is to: (B)

(A) Establish the highest possible price that a property can sell for
(B) Establish the most probable price that would be paid for property under competitive
market conditions
(C) Establish the market value for a property’s land without any structures (such as a house)
(D) Establish the market value for a property if the property is put to its highest and best use

23. An appraisal usually contains three approaches to valuation. Which of the following is NOT
one of those approaches? (B)

(A) The Market Approach

(B) The Ratio Approach
(C) The Cost Approach
(D) The Income Approach

24. The subject of an appraisal has only two bedrooms, but one of the comparables used in the
appraisal has three. If the adjustment for a third bedroom is $5,000, the adjustment would
be: (B)

(A) A $5,000 increase to the comparable's selling price

(B) A $5,000 decrease to the comparable's selling price
(C) A $5,000 increase to the subject's selling price
(D) A $5,000 decrease to the subject's selling price.

25. The appraised value of a property usually represents the: (C)

(A) Actual value of the property

(B) Actual selling price of the property
(C) Actual opinion of an appraiser
(D) Actual replacement value of the property

26. When considering the federal income tax treatment for housing, which of the following is tax
deductible? (B)

(A) Loan amortization

(B) Interest on mortgage loans
(C) Insurance
(D) None of the above

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27. When calculating taxes, the difference between the acquisition cost and selling price of a
house is called: (C)

(A) Ordinary income

(B) Amortization
(C) Capital gain
(D) Deferred income

28. Which of the following would NOT result in an increase in housing demand? (C)

(A) Population growth

(B) Employment growth
(C) Higher interest rates
(D) Higher household income

29. The influence on property values brought about by a net benefit related to the value of public
goods less their cost is referred to as: (C)

(A) A capital gain

(B) A capital loss
(C) The capitalization effect
(D) The depreciation effect

30. When a homeowner improves some aspect of his property far in excess of comparable
properties in the neighborhood, he is said to have: (B)

(A) Under-improved the property

(B) Over-improved the property
(C) Reached the point of increasing returns
(D) Exceeded the breakeven point

31. Federal income tax policy has generally been thought to: (D)

(A) Discourage homeownership

(B) Encourage renting
(C) Increase interest rates
(D) Encourage homeownership

32. Which of the following is NOT tax deductible for homeowners? (D)

(A) Points in mortgage loans

(B) Mortgage interest
(C) Property taxes
(D) Maintenance expenses

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