Real estate is critical to the US economy. Residential real estate primarily serves as a source of housing for families. It is also the primary source of wealth and savings for many Americans. Commercial real estate, which includes apartment buildings, stimulates the economy by providing retail, office, and manufacturing space. For millions, the real estate business and investing provide a source of revenue.
Last year, real estate added $1.15 trillion to the US economy. This calculation equates to 6.2% of gross domestic output in the United States. It is higher than the $1.13 trillion recorded in 2017 but remains below the $1.19 trillion recorded in 2006. Real estate construction accounted for a sizable 8.9% of GDP at the time.
Real estate construction is a labor-intensive industry that contributes significantly to job generation. Housing construction declines significantly during a crisis, contributing to the recession’s high unemployment rate.
Ripple Effect
Construction is the only sector of real estate that is quantifiable in terms of GDP. However, real estate significantly impacts several other aspects of economic well-being that are not quantifiable. For instance, a residential real estate sales reduction eventually falls in residential real estate prices.
This drop reduces the value of all homes, regardless of whether owners are actively selling. It decreases the number of homeowners who can obtain home equity loans. This decrease reduces consumer spending as more homeowner cash is invested in home improvement initiatives.
Almost 70% of the US economy is built on consumer spending. Reduced consumer spending contributes to the economy’s downward spiral. This spiral further decreases employment, income, and consumer expenditure. Without intervention by the Federal Reserve in interest rate reductions, the country risks entering a recession. The only advantage of reduced housing prices is that they reduce the likelihood of inflation.
Real Estate and the Great Recession of 2008
There is no better illustration of real estate’s economic influence than the 2008 financial crisis. The decline was initially precipitated by falling housing values, but few recognized it then. According to the National Association of Realtors, the median price of an existing single-family house was down 4% from its October 2005 peak in July 2007.
However, economists couldn’t agree on the magnitude of the problem. While the terms “recession,” “bear market,” and “stock market correction” are well-defined, the same cannot be said for the housing market.
Many compared it to the 24% decrease experienced during the 1929 Great Depression. They also compared it to the loss of 22% and 40% in oil-producing areas in the early 1980s. By those measures, the slump was insignificant.
However, the crash gained momentum swiftly. According to several economic studies, housing price drops between 10% and 15% are sufficient to wipe out homeowners’ equity. This issue occurred as early as 2007 in several Florida, Nevada, and Louisiana areas.
Most Americans predict the housing market will implode within the next two years. They see stagnant property prices and the Fed beginning to lower interest rates. To them, it appears to be a bubble about to explode.
However, there are numerous distinctions between the present housing market and 2005. For instance, subprime loans account for a lesser share of the mortgage market (though they are growing again under the “nonprime loans” name). They contributed 20% in 2005. Additionally, banks have tightened lending standards. Home flippers must contribute between 20% and 45% of the cost of a home. They required 20% or less during the subprime crisis.
Most importantly, homeowners are not removing as much equity from their homes as they once did. In 2006, home equity reached $85 billion. 2010, it plummeted to less than $10 billion and remained there until 2015. It has only increased to $14 billion by 2017.
One significant reason is that fewer people are declaring bankruptcy. Only 770,846 people declared bankruptcy in 2016. 1.5 million people did so in 2010. According to some economists, this is a result of Obamacare. With more people insured, they are less likely to be overwhelmed by medical expenditures. These distinctions reduce the likelihood of a home market collapse.
Economy and Real Estate
Real estate is a significant driver of economic activity in any country, from property purchase and sale transactions to all related activities. Consider every home in your country, including every neighborhood you see daily. Every one of those houses presents an investment made by someone and the effort invested in owning that property.
You own and hold a piece of property for an extended period; it can be defined as a savings account. Real estate can offer a significant gain in value. It allows people to go to dinners and spend money on other items, increasing the economy’s worth.
Additionally, homes require extensive maintenance and care, which includes a separate category in and of itself since it generates jobs. This generation of jobs stimulates the economy since those individuals buy or rent vehicles that cost money and consume fuel that promotes the economy for betterment, and the cycle continues.
Additionally, home remodeling is a significant engine for job creation. When homeowners improve their properties, they purchase raw materials, which fuels the economy.
The EndNote: Real Estate – The Best Investment Opportunity
The size and scope of the real estate arena attract and reward a large number of investors. Investors can invest in real estate or indirectly via managed funds. Direct real estate investing entails purchasing commercial or residential property as an income-producing asset or future selling.
Indirect real estate investment options include ETFs, CREFs, infrastructure funds, and REITs. Because of the market’s increased liquidity, lower capital requirements, cheaper transaction costs, and regular investors indirectly participate in real estate.
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