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Impact of Real Estate Market on the Economy

DEFINITION

This articles takes an in-depth look at how the real estate sector contributes to economic growth in the United States.

EXPLANATION

The real estate industry is one of the most important sectors in the United States given that it makes up a significant portion of the country’s GDP. For example, in 2017, the contribution of real estate construction to the country’s overall economic output was about $1.34 trillion, which is 7% of the U.S GDP. You should keep in mind that the construction of real estate is the only segment that is calculated as part of GDP.

Unemployment rate

The real estate construction industry is directly related to the overall unemployment rate in the country mainly because it is a very labor intensive activity. Whenever, there is a slump in property construction projects, the country’s unemployment rate typically rises given that the industry creates millions of jobs each year.

Contribution to the nation’s wealth

Real estate is regarded as one of the best ways to accumulate and store wealth within the United States and in many nations across the globe. One of the main reasons why real estate is so valuable is because it is an asset class whose value increases with the passage of time as opposed to other types of assets whose value depreciates over time.

It is an established fact that for most Americans, buying a home is one of the biggest purchases they will ever make in their lifetimes. A home is also one of the biggest assets that most households have and represents the ultimate form of the American dream. Most Americans work for many years to afford a down payment for their home and then spend up to thirty years of their lives paying off their mortgages.

Whenever there is a downturn in the real estate market such as in 2007, home ownership levels usually decline as a large percentage of homeowners default on their mortgages leading to foreclosures and bankruptcy filings. In such cases, the average wealth of most Americans drops significantly, which also affects the economic growth of the country.

Finally, most of America’s economy is based on consumption, which means that when people feel wealthy, which means when house prices rise leading to gains in home equity, Americans tend to spend more and this leads to higher economic growth. However, when real estate prices decline, most people feel poorer because of the lower values of their homes and they reduce their spending, which leads to slower economic growth. This is what happened during the economic crisis and recession of 2007-2008.

Realtors and mortgage lenders make money

The real estate sector contributes to the nation’s overall economic growth as it allows the sellers involved to make significant profits. There are many full-time and part time realtors who make a living finding, listing and selling homes. Such people earn a living by searching for properties through the internet or by physical prospecting and then making these homes available to potential buyers.

Mortgage lenders also make a lot of profit from issuing mortgages to qualified homeowners with high credit ratings who typically have lower risk of defaulting. Such lenders make their profits from the interest charged on mortgage loans and stand to make more profits when interest rates increase. In many cases, borrowers who have paid of a large portion of their mortgages may choose to refinance their homes, which leads to more profits for the lenders from the issuance of the new loans.

Real estate construction companies also make significant profits once they successfully complete their projects and put the new properties up for sale or rent in the market. The real estate sector generates a lot of wealth and employment opportunity throughout the economy.

Creates new jobs

As stated earlier the real estate sector creates thousands of new jobs each year, both directly and indirectly. The construction industry creates blue collar jobs for people such as plumbers, electricians, stone masons, contractors and machine operators among others. These jobs allow the employees to provide for their families by allowing them to earn a living.

However, whenever there is a downturn in the economy, real estate construction usually declines as developers hesitate to start new projects because of a lack of buyers and lenders. In such cases, many workers employed in this sector typically lose their jobs and they may have to look for low-skilled jobs in other industries, which derails the economy.

Contribution to tax revenues

The real estate industry makes up a large portion of the taxes collected by most local authorities across the United States. Therefore, whenever the real estate sector is booming, local governments benefit immensely from higher revenues generated by the industry. Real estate transactions are taxed based on their sale prices as well as the appreciation of property values.

Multiplier effect

The housing sector also has a multiplier effect on the country’s economy because as people buy new homes, they trigger spending in other parts of the economy. In most cases, new homeowners will also spend money on new furniture and appliances for their homes. There are also other costs associated with owning a home such as hiring workers to renovate parts of the house as well as hiring movers to help you move into your new home. All these activities generate revenue in other sectors of the economy, which is why this is referred to as the multiplier effect.

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