REAL ESTATE AND THE ECONOMY - Essay Example

The paper, however, discusses it in the U.S. context and explains that how it influence the economy. Real Estate and its Impact on U.S. Economy Real estate market’s strength or weakness has huge influences on U.S. economy. It was hard to admit that financial system was broken after the collapse of real estate bubble. Development in real estate is closely linked with the U.S. economy and its role cannot be ignored in our future progress (Babigian, 2011).U.S. real estate market is divided into commercial and residential real estate.

Real estate constitutes several important aspects of economic activity. It has direct and indirect impact on the level and composition of real gross domestic product (GDP).In addition to new construction, real estate is a lasting asset which holds crucial balance sheet effects. For instance, lasting increase in household net worth that originates from rising real house prices suppose to trigger household spending on goods and services. There is a general agreement on the effect of wealth on household behavior; however, its magnitude is somewhat less agreed upon (Missouri, 2007, p.1).According to Missouri (2007): Currently residential fixed investment comprises a little less than 5 percent of GDP.

There are myriad of direct and indirect effects associated with real estate that spill over into the other aspects of economy, such as the demand for lumber, labor and other commodities used in the construction of structures or in remodeling activity.(p.1) There is fairly large nonresidential component in the U.S. real estate economy. Determinants of new construction in this sector are comparatively different because commercial or industrial structure is established asset and business will only invest in it if rate of return is at least comparable to its opportunity cost (Missouri, 2007, p.1).Real estate industry contributed over $1,472 billion to U.S. GDP in 2005 that amounts to 11.

9 percent of total GDP. The value added from real estate, leasing, and rental practices increased to over $1,731 billion (13.2 percent) of total GDP in 2006(Anari,2008,p.2).According to Anari (2008), “In 2006, Texas’ real estate industry was the second most important private industry after manufacturing. The industry’s contribution to the state’s GDP in 2005 was more than $79 billion… [that amounts to] 8 percent of the Texas GDP” (p.2). Real GDP is the most extensive measure of goods and services produced in country in a particular time period.

Among the major components of GDP, structure shared approximately 10 percent for last 25 years. In addition, other goods and services are associated with structure, such as furniture, utilities, and roads. Generally, residential expenditures are larger than that of nonresidential structures. In 2007, residential fixed investment constituted approximately 30 percent of the total private fixed investment while nonresidential structures constituted 20 percent. Residential fixed investment rise from 2000 to 2006 is considered to be quite unusual (Missouri, 2007, pp.2-5).In 2007, According to Missouri (2007): … Construction spending has totaled a bit less than $1.

2 trillion at a seasonally adjusted annual rate, with private construction outlays comprising a little more than three-quarters of the total and public construction outlays the remaining one quarter. (p.5) There has been a reasonable upward shift