How Does Real Estate Affect the US Economy - Assignment Example

Real e can be a fairly confusing concept for some people. The first thought for many is that real e is the buying and selling of personal homes. However this would only cover one small part of real estate - residential real estate. With a little prodding and guidance these same people might even be able to reach the conclusion that farms are a form of real estate - agricultural real estate. If the curious were to probe even further into the concepts held about real estate, it would be possible to find that most people agree that real estate can include the many different actions involved in the buying, trading, selling, and renting of the land itself. It might be interesting to note that many sources define real estate as "land and everything made permanently a part thereof, and the nature and extent of one's interest therein" (Real Estate 2007). It is important to remember that the land may not be worth very much in and of itself. It is valuable because of the interest it holds for the owner. Perhaps the land is valuable because of its position in relation to something else. Or it could be valuable because of what lies underneath the soil such as oil, minerals, or even archeological treasures. Or perhaps valuable things reside on its surface such as timber, animals, or historical sites. Or it could simply be that the most valuable asset of land is what it can be used for. It then becomes clear that the true purpose of real estate is to create a situation in which the land is developed so it is being used to appropriately further the interest of its owner. According to a brief review of real estate in Wikipedia (Real Estate 2008) real estate covers every step in the process of acquiring or disposing of land. When an individual wishes to find a particular property she may consult a real estate brokerage in hopes of either buying property or investing in property. Similarly an individual wishing to sell his property may also consult a real estate brokerage in hopes of finding a suitable buyer. Real estate offers many services for those wishing to sale property. Real estate marketing is a subfield of real estate that focuses solely on the issues related to the sale of property. It then becomes important to remember that buying and selling is not the only things that can be done with property. Some individuals wish to retain ownership of their property for a variety of reasons but may allow others to use it. They may rent out the buildings or give permission for the land to be farmed or for a profit-generating structure to be built on it. In cases where the primary purpose of a property is to make a profit those involved move into the area of commercial real estate. Commercial real estate can involve the building of a hospital, parking garage, shopping mall, and in some cases (especially for tax and loan purposes) residential structures which will house a specific number of people (Real Estate 2008). Keeping in mind that real estate includes the buildings as well as the land such individuals may require assistance in keeping up with all the things required of the myriad options and transactions required in dealing with property. Real estate has taken this into account and created yet another subfield called property management that devotes its time and resources to exactly this sort of arrangement. Property management tends to be a highly sought real estate service especially among those individuals who own several properties that are rented out and for commercial properties (Real Estate 2008). All of this occurs before anything is to done to the land itself. When improves or additions are made to the land - such as building new structures - another branch of real estate called development comes to the fore as the property is restructured for a specific use. The possibilities to develop real estate are limited only by the human imagination, the availability of materials, and the money available for the project. Residential real estate relies heavily on the finances of the individual doing the development. Although loans may be acquired for the purchase and renovation of property, the earning ability of the borrower will ultimately determine the maximum loan available. Commercial real estate on the other hand is a conglomeration of various investors who provide money in order to see the development completed. It should come as little surprise then to learn that real estate is intimately linked to the overall economy. As President of the Federal Reserve Bank at St. Louis, William Poole (2007), said, "[r]eal estate comprises many important aspects of economic activity, both direct and indirect effects on the level and composition of real Gross domestic product" and so it becomes vital to review the ideas behind the Gross domestic product (GDP). For those who are neither economists nor interested in the intricacies of the economy, Kimberly Amadeo (2008) does an excellent job of simplifying this concept. The Gross domestic product simply shows what the United States is good at producing. At the same time the Gross domestic product is often referred to as a sign of the health of the overall economy as it is the "broadest measure of the goods and services" produced in the United States over the course of a year (Poole 2007). This makes sense only if it is pointed out that 70% of the GDP is made up of items created for personal consumption. If most of what the United States is good at producing is used by those living in America, then it makes sense that when these people spend less a decline in the overall economy will occur and the Gross domestic product will also decrease. However, we must continue to follow Amadeo (2008) as she proceeds to breakdown Gross domestic product and lead us to the link between real estate and the economy. We need to break down personal consumption into its component parts. Amadeo (2008) explains that of the items which make up personal consumption, almost half are various services required by the consumers. When we further consider the services that are most needed in our lives, it should come as no surprise that health care is the top service (12%) followed closely by - wait for it - real estate services (10%). In essence this means that 10% of the total United States economy relies on real estate (Amadeo 2008). The link between real estate and economy is so strong that models of the economy can be generated based solely on the real estate market which has a decidedly cyclical nature (Poole 2007). When trying to predict the start and end of economic recession, economists look to housing trends (residential real estate values) and the construction of non-residential structures (commercial real estate values) as the top two indicators. Economists have found that once housing prices peak, an economic decline or recession will begin within the next three financial quarters. This situation is often referred to as a housing bubble and the United States has been in just such a situation since the mid-2000s. However, housing values not only signal the onset of a recession, they signal the end of one as well. If current real estate markets are truly a sign of the economy to come, then the United States are starting to see the end of the current housing bubble and return to economic prosperity. While many would say that the most obvious effect of real estate on the economy comes from the buying and selling of homes and the previous paragraph would seem to support such an opinion, this statement would be inaccurate at best. Residential real estate transactions of this nature only account for an extremely small portion of the overall economy. This small portion is reputed to have grown in the last few years though and the residential housing market is now credited with being 16% of the overall Gross domestic product in 2005 (Leonhardt 2005). Recent studies have shown that this is not case in 2007. With the onset of the housing bubble, the demand for purchasable homes has dropped dramatically. Thankfully, the call for rental properties and hotels has risen (Molony 2006). It seems that now it is the development of real estate that has the most direct effect on the economy. Development often necessitates construction and which in turn requires a variety of supplies (e.g. lumber, paint, insulation, glass) and a vast amount of labor that impact numerous aspects of the economy (Poole 2007). Commercial real estate has also been referred to as the "real estate industrial complex" and an "economic engine" (Leonhardt 2005) and this is supported in a 2007 report from the National Association of Industrial and Office Properties. IN 2005, commercial real estate accounted for $500 billion dollars of the gross domestic product, of which $266 billion was the result of actual construction and the remainder came from the need for architects, engineers and related "soft costs" and actual building operation costs (Business First of Buffalo 2007). The same study found the commercial real estate was responsible for 4.2 million jobs nationwide of which 700,000 were reportedly new while other areas lost jobs. Commercial real estate continues to be a bright spot in the economy as trade remains strong. Trade remains strong because Americans are still buying and the demand for products still exists. As trade flourishes the need for office space and warehouses continues to climb. Americans are still traveling and international visitors are still visiting the country in large numbers especially as the value of the Euro is so high. The real estate needs of the hospitality markets for hotels, restaurants, and retail locations still climbs. Even though the demand for single-family dwellings is suffering a set back, the call for multi-family dwellings and rental properties continues unabated (Molony 2006). This shows not only the link between real estate and the economy but also the link between the different branches of real estate to form a comprehensive whole. Once again we can turn to Kimberly Amadeo (2008) for a simple summary of the link between real estate and economy. She begins with a decline in real estate sales. A decline in sales of real estate will eventually lead to a decline in real estate prices which effectively reduces the value of residential structures (homes). This devaluation is not limited to homes for sale, it applies to all homeowners. The reduced value of homes in turn reduces the amount of home equity loans the homeowner can get which immediately affects consumer spending. In this day and age, many people get by using a combination of salary, credit cards and loans. With a reduction in the amount of loans available, people begin to feel a money crunch whether it actually exists or not. In turn they decrease the amount they spend and a decline in consumer spending occurs. Reduced in consumer spending will contribute to a downward spiral in the economy via the gross domestic product which leads to increased unemployment. Thus the cycle begins again with a further reduction in income, a further reduction in consumer spending, and so on. Once it becomes apparent that real estate is intricately linked to our economy, people may become more interested in exactly what real estate is and how it works. Real estate is so much more than the buying and selling of land - it is the "land and everything made permanently a part thereof, and the nature and extent of one's interest therein" (Real Estate 2007). Residential real estate lies at the heart of so much of what every working person does because owning a home is a standard part of the "American dream". However, the exact nature of that ownership and the home in questions is changing as time goes on and changes to the property may be necessary. Yet the interest an owner has in the land may include purposes other than creating another residential unit; he may wish to make a profit from the property and/or meet a need of the community in which the property resides. Real estate development plays a key role in changing land into a place where this purpose is realized as well as changing residential units into dream homes. Real estate brokerages function to make the buy-sale transactions easier for those involved while real estate management helps keep track of the property or properties in every transaction it undergoes. It should be obvious by this point that real estate is a web of connected areas that make the entire system work. Even though real estate can be divided into many specialized fields, it is in all honesty an interrelated and interdependent field. The entire field of real estate has a strong bearing on the economy and in turn consumer spending. The cycles demonstrated in real estate and the link to times of recession cannot be ignored. In order to be financial prepared and informed, all we have to do is look to real estate for clues. How could any working individual not feel a need to be knowledgeable of real estate as she struggles to realize financial independence and stability for the future WORKS CITED: Amadeo, K. (2008) How does real estate affect the U.S. economy Retrieve April 22, 2008, from http://useconomy.about.com/od/grossdomesticproduct/f/Real_estate_faq.htm Business First of Buffalo. (2007). Commercial real estate pumps economy. Retrieved April 22, 2008, from http://phoenix.bizjournals.com/buffalo/stories/2007/05/21/daily39.html Leonhardt, D. (2005). Boom in jobs, not just houses, as real estate drives economy. Retrieved April 29, 2008, from http://www.nytimes.com/2005/07/09/realestate/09complex.htmlex=1278561600&en=50e9d8c4cea38cd6&ei=5090&partner=rssuserland&emc=rss Molony, W. (2006). Commercial real estate bright spot in national economy. Retrieved April 22, 2008, from http://www.realtor.org/press_room/news_releases/2006/cmrclmrktforecastjune06 Poole, W. (2007) Real estate in the U.S. economy Retrieve April 29, 2008, from http://www.stlouisfed.org/news/speeches/2007/10_09_07.html "Real estate." (2007). Microsoft Encarta Online Encyclopedia 2007. Retrieved April 29, 2008, from http://encarta.msn.com "Real estate." (2008). Wikipedia, The Free Encyclopedia. Retrieved May 1, 2008, from http://en.wikipedia.org/w/index.phptitle=Real_estate&oldid=209495081 Read More