The Real Estate Industry

The Real Estate Industry

Introduction:

The real estate industry is one of the most important industries in the US, the real estate industry deals with renting, leasing, buying and selling real estate properties. According to the US bureau of labor statistics the industry as at September 2009 had 1,398 thousand employees. The following is an analysis of some of the key macroeconomic variables that affect the industry and also challenges and opportunities in the real estate industry.

Macroeconomic factors affecting the industry:

Unemployment:

The real estate industry is affected by high unemployment rate in the economy, when the rate of unemployment is high then the per capita income in the economy declines, this result into a decline in demand for goods in the economy. Real estate products are affected by this decline in demand and therefore the demand for products and services offered declines reducing the level of output by the industry. (Allaway (1999))

Inflation:

Inflation is another macro economic factor that affects the real estate industry, increase in prices in the economy results into an increase in inputs used in industries, these results into lower

The Real Estate Industry

profitability in the industry. High inflation also means that the consumers experience a reduction in their disposable income and therefore will demand less goods and services in the economy, as a result this also affects the demand for products produced in the real estate industry. (Allaway (1999))

Interest rates:

The real estate industry also involve the selling and buying of real estate properties, an increase in interest rates in the economy means that the cost of borrowed funds increases, this affects the real estate in two ways, one of this way is evident where a increase in interest rates will discourage borrowing by consumers and therefore this will reduce demand for real estate properties, interest rate increase will also result into high cost of capital required in investing in the real estate industry and therefore reduce the profitability of firms in the industry. (Allaway (1999))

Data:

This section compares the performance of the industry with the unemployment levels and interest rates, it is expected that as unemployment levels rise in the economy rises then the real estate output will decline. On the other hand as the interest rate increases then the real estate output will also decline. The employment level in the real estate industry in this paper is used as an indicator of growth in the industry.

The Real Estate Industry

Unemployment in the economy:

As unemployment increases the real GDP per capita declines, therefore the demand for goods and services in the economy declines, the following chart shows unemployment levels and employment levels in the real estate industry over the years: (BLS (2009))

From the above chart it is evident that the rate of unemployment has increased in the recent past, as a result the rate of employment in the real estate industry has also slightly declined meaning that the production level of the industry has also declined.

Interest rates:

As interest rates increases the cost of capital increases and this discourages consumers to borrow capital, as a result the demand in the real estate industry declines, also as the cost of capital increases the cost of production in the real estate industry rises, the following chart summarizes the interest rate level and the level of employment in the real estate industry: (BLS (2009))

From the above chart it is evident that the rate of interest has increased in the recent past, as a result the rate of employment in the real estate industry has also slightly declined meaning that the production level of the industry has declined.

The Real Estate Industry

Challenges:

Housing market bubble:

There are a number of challenges facing the real estate industry, one of these challenges is the housing market bubbles, this results when there is a rise in prices of real estate properties such as land and this rise cannot be explained by economic attributes of the property, a market bubble is characterized by high increase in price of property and the end result of the bubble is a bubble burst, when this occurs the prices of real estate properties decline. This affects the real estate market whereby the decline in value leads to a loss of wealth to both the real estate firms and the consumers who hold real estate property. (Allaway (1999))

Opportunities:

With the increasing urban population and the demand for housing the real estate industry is expected to expand, this is an opportunity for real estate firms to invest more to meet the demand of the rising population especially in urban areas. On the other hand the end of the recession is expected to result into an upward shift in economic activities whereby economic growth is expected to rise in the future, therefore with the expected expansion after the contraction of the economy resulting into a recession there is an opportunity for the real estate firms to invest more in the economy to realize high profits.

Conclusion:

The Real Estate Industry

From the above discussion it is evident that the rate of interest and the unemployment level in the economy affect the real estate industry, as unemployment rises the real estate industry is affected negatively, on the other hand as interest rates increase the cost of borrowing capital increases affecting the real estate industry. Challenges include housing market bubble and an opportunity in the industry is population growth that increases demand for products produced by the real estate industry.

References:

October, from http://data.bls.gov/PDQ/servlet/SurveyOutputServlet ;jsessionid=a2307835cba35 e693b2e

October, from http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers &series_id=LNS14000000

October, from http://www.federalreserve.gov/RELEASES/H15/data/Monthly/H15_FCP_M3.txt

Fillmore Galaty and Wellington Allaway (1999) Modern Real Estate Practice, McGraw Hill Press, New York