How the Real Estate Economy Affects the National Economy

Real estate is not just about buying and selling houses. It is also a significant driver of economic activity, wealth creation, and employment. In this blog post, we will explore how the real estate economy affects the national economy in various ways.

Real estate and consumer spending

One of the most apparent ways real estate affects the national economy is through consumer spending. Consumer spending accounts for about 70% of the U.S. gross domestic product (GDP), which measures the total value of goods and services produced in a country. When people buy or sell homes, they also spend money on furniture, appliances, renovations, moving, and other related expenses. This stimulates the demand for goods and services, boosting businesses' income and profits.

Moreover, when home prices rise, homeowners feel more prosperous and confident about their financial situation. This increases their propensity to borrow and spend on other things, such as cars, vacations, or education. This is known as the wealth effect, and it can positively impact the national economy. Conversely, homeowners feel poorer and more cautious about their spending when home prices fall. This reduces their consumption and borrowing, which can hurt the national economy.

Real estate and construction

Another way that it affects the national economy is through construction. Construction is a labor-intensive and capital-intensive industry that employs millions of workers and uses many materials and equipment. According to the U.S. Bureau of Economic Analysis, real estate construction contributed $1.15 trillion to the nation's economic output in 2018, which was 6.2% of the U.S. GDP. This includes residential and commercial , as well as infrastructure projects.

When the demand for it is high, construction activity increases, which creates more jobs and income for workers and contractors. This also stimulates the demand for raw materials, such as lumber, steel, cement, and glass, which benefits the suppliers and manufacturers of these products. Additionally, construction projects generate tax revenues for the government, which can be used to fund public services and programs.

On the other hand, when the demand for it is low, construction activity decreases, reducing workers' and contractors' employment and income. This also lowers the demand for raw materials, which hurts the suppliers and manufacturers of these products. Furthermore, construction projects generate less tax revenues for the government, which can limit its ability to provide public services and programs.

Real estate and financial markets

A third way it affects the national economy is through financial markets. Financial markets are where people and institutions buy and sell financial assets, such as stocks, bonds, currencies, and derivatives. These markets are crucial in allocating capital, facilitating trade, and transmitting economic information.

Real estate is closely linked to financial markets, as many people and businesses use mortgages, loans, and securities to finance their real estate transactions. For example, when a person buys a house, they usually take out a mortgage from a bank or a lender, who then sells the mortgage to an investor or a financial institution, who then packages the mortgage with other mortgages and creates a mortgage-backed security, which is then traded in the financial market.

When the real estate market is booming, the demand for mortgages and loans increases, lowering interest rates and making borrowing cheaper and more accessible. This encourages more people and businesses to buy and sell real estate, fueling the demand for mortgages and loans. This also increases the supply and demand for mortgage-backed securities and other financial products, which raises their prices and returns. This benefits the lenders, investors, and financial institutions involved in real estate financing.

However, when the real estate market is busting, the demand for mortgages and loans decreases, raising interest rates and making borrowing more expensive and complicated. This discourages more people and businesses from buying and selling real estate, reducing the demand for mortgages and loans. This also decreases the supply and demand for mortgage-backed securities and other financial products, which lowers their prices and returns. This hurts the lenders, investors, and financial institutions involved in real estate financing.

Conclusion

As we have seen, the real estate economy affects the national economy in various ways, such as consumer spending, construction, and financial markets. These effects can be positive or negative, depending on the state and direction of the real estate market. Therefore, monitoring and understanding the trends and developments in the real estate industry is essential, as they can have significant implications for overall economic performance and well-being.