The Role of Real Estate in the Economy

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Real estate stands as a fundamental piece of the United States’ economy. In fact, real estate construction contributed $1.2 trillion to the nation’s economic output through Investment (I) in 2016, six percent of the national G
DP. Although many would think that buying houses would fall under Consumption (C), it goes into Investment because of the magnitude and capital value of the purchases.

On the residential side, real estate provides citizens with housing. Whereas the commercial side includes property solely used for business purposes, for example, malls, office parks, restaurants, gas station, convenience stores and office towers. Lastly, comes industrial real estate, which includes all land and buildings either utilized or suited for industrial activities, such as, factories, mines and farms.

With all this said, construction, the actual building of buildings, is the only part of real estate that is measured by GDP. However, real estate impacts many other sectors of economic well being that GDP does not measure. For instance, when real estate sales decline, real estate prices will eventually decline. This lowers the value of homes, which reduces the number of home equity loans available to owners and thus leads to a decrease in consumption. A fall in consumer spending leads to further unemployment and a reduction in income. Thus, if the Federal Reserve fails to reduce interest rates the country can fall into a recession, similar to what we saw in 2008 with the Great Recession.

Furthermore, the real estate world creates an abundance of jobs throughout all sectors. Each role works together in cohesion to get deals done, and provides employment for millions of Americans. For example, there are roles in brokerage that serve buyers and sellers in the real estate transaction process. Both the buying agent and the selling agent charge a commission of a given property’s selling price, which brokers research and analyze.

Looking to politics, President Trump, a longtime real estate mogul, has stressed ‘buy America, sell America.’ This means a rise in home prices and increase in employment will be a major key to drive growth in the real estate sector. It will be interesting to see what more President Trump will do in regards to the real estate market. My guess is that he will implement industry-friendly policies in effort to improve the market.

 

Sources:

https://www.thebalance.com/how-does-real-estate-affect-the-u-s-economy-3306018

https://www.thebalance.com/how-does-real-estate-affect-the-u-s-economy-3306018

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7 thoughts on “The Role of Real Estate in the Economy

  1. kevinlynch123

    This post reminded me of the Great Recession of 2008. Increased home construction is viewed positively through in increase in I, and by extension, GDP. But we must also consider whether the increase in home construction can actually be paid for. If too much is financed through unsustainable debt, as was the case leading up to 2008, it can lead to massively detrimental effects.
    -Kevin Lynch

    Reply
  2. jpcoug19

    Jack, great post kid. Love the stress you put on the importance of real estate in the current economy. I think you are right by saying it is extremely important for this market to be strong because of the effect it has behind the scenes with job creation. Also looking forward what Trump will do to improve the market.

    Johnny Coughlin

    Reply
  3. nickbotta

    Great work Jack! I like your paragraph about the abundance of jobs that the real estate industry generates. I wonder if there is any way that President Trump can tap into this piece of the industry to try and generate more jobs throughout the country. I wonder what Trump will do to help this market with his vast knowledge and experience in the industry. It should be interesting!

    Reply
  4. cnhend19

    Real estate and the housing market is definitely a huge part of our economy, as made evident by the Great Recession. I feel that this is, in part, because of the emphasis of home-ownership and employment in our culture (“The American Dream”).

    Reply
  5. mikelaffin22

    Great post Jack! I really enjoyed reading the section on the number of jobs the real estate industry creates for the country. Like you mentioned, there are many different sectors that contribute to the building, buying, and selling of a house, in turn creating a great deal of job opportunities. As Nick mentioned above, I am also interested to see how President Trump uses the real estate industry to help try to boost the US economy given his success in this field in his private life.

    Michael Laffin

    Reply
  6. Victor Matheson

    To defend the Fed here, it should be pointed out that the Fed did not fail to cut interest rates as we fell into the Great Recession in 2008. In fact, they cut them to record low levels and kept them there for years. The problem was that the Great Recession was so severe, even 0% interest rates was not enough to quickly stimulate the economy back to full output. In other words, we were in a liquidity trap.

    Reply
  7. rjdowd19

    The real estate sector seems to be continuously growing since the Great Recession. In major cities like Boston for example, massive construction operations are in full effect leading to job creation and economic output. I am curious what the Fed’s recent decision to leave interest rates unchanged will have on this sector.

    Reply

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