The impact of the real estate industry on the economy is significant. It creates jobs, produces wealth, generates income and provides shelter.
The trends in real estate offer insights into the economy's health. And when real estate suffers, so does the U.S. economy.
Real estate construction can generate more than $1 trillion in the U.S.'s economic output, or about 6% of gross domestic product. Another major impact of the real estate industry in the economy is housing construction. Big dips in construction typically mean higher unemployment rates, which shows the importance of the real estate industry.
Real Estate's Ripple Effect
Real estate has a ripple effect on the national economy. When real estate sales drop, real estate values drop. When the value of homes drops, it reduces the equity available to homeowners for loans. Less equity means reduced consumer spending, a byproduct of homeowners not having access to cash in their home values.
Because the U.S. economy relies on personal consumption to thrive, a drop in consumer spending becomes part of a downward trend. A declining U.S. economy means loss of jobs, higher unemployment rates, reduced incomes and less consumer spending.
How Real Estate Helps Other Industries
Real estate requires maintenance, pumping life into other economic activity. The housing market requires gardeners, home repair services and renovation contractors. This business is another impact of the real estate industry on the economy.
The workers in these fields drive vehicles to get to their jobs, and that requires them to spend money at car dealerships and repair shops. They buy fuel to drive their vehicles, which in turn fuels the national economy. They rent and own housing, another economic contribution.
When property owners improve their homes, they must buy raw materials like lumber and windows. This also drives the U.S. economy.
Real Estate's Impact on Inflation
The Housing Market Index is a closely monitored metric in the industry that measures the outlook for home sales, another impact of the real estate industry on the economy. In late 2022, the Housing Market Index dipped to 33 on a 100-point scale. Economists watch the index because anything under 50 is cause for concern.
As the real estate market goes, so goes the U.S. economy. A low Housing Market Index reflects a recession in the housing market. Economists note that the housing market generally is the canary in the coal mine; when it goes into recession, the U.S. economy typically is not far behind. The housing market also leads the national economy out of recession because of the numerous factors that impact U.S. jobs, wealth and income.
When home prices dip, that's typically a sign that inflation is cooling off. The Federal Reserve controls inflation by increasing interest rates, which can indirectly lead to higher interest rates for real estate loans. But as real estate interest rates begin to fall, this is usually a sign that a recession is ending.
Real Estate's Role in the Great Recession
A recent example of real estate's impact on the U.S. economy is the Great Recession, which began in 2007 with the collapse of the housing market the following year. At first, home prices began to fall quickly in states like Florida and Louisiana. In some cases, prices fell by as much as 15% in a few years.
As real estate values dropped, homeowners found they owed more on real estate loans than the property was worth. In many cases, homeowners could no longer pay their mortgages. Because so many of the real estate loans issued from 2005 to 2007 were riskier subprime loans, the risk of borrower default was higher.
When the borrowers defaulted, the riskier subprime loans that were sold as part of mortgaged-back securities to investors no longer held their value to buyers. The properties used to collateralize the subprime loans no longer held the same value, which meant there was less security on the loans. Investors holding trillions of dollars worth of mortgage-backed securities struggled to cash out their holdings through credit default swaps, but banks didn't have enough cash.
The bankruptcy of Lehman Brothers in 2008 triggered the Great Recession.
Want to Know More About Real Estate?
You can learn more about real estate, investing and the market by joining other new and experienced investors at Chandler David Smith. A comprehensive schedule of real estate courses can help you earn passive income through real estate investing. Check out the website to start investing in real estate today.