Real estate and the economy
By: J. David Chapman/June 9, 2022
As national economists begin to predict the chances of a recession, people are beginning to ask me what effect the economy, inflation, and increased fuel prices are going to have on the real estate markets. It has made me contemplate the complex relationship between the economy and real estate.
The relationship between the economy and the housing market is a unique one, and it plays a huge role in the way we make decisions, spend money, and go about our daily lives. The real estate industry has had an incredible influence on the economy and has indeed helped put economies into recession, and it has been used to depart recessions.
Historically, there has been a strong correlation between the real estate industry and the state of the economy. This could be because the real estate industry accounts for about 18% of the gross domestic product in the United States. It is understandable that the two might “boost” each other when needed. We tend to see home sales increase as confidence in the economy increases and home sales might translate to more overall confidence in the economy.
The housing market influences the economy in many ways. Real estate sales and development is a complicated, complex process (maybe unreasonably so) involving many professions creating jobs. The process starts as a building is planned with architects, engineers, planners and analysts, and it continues with builders, constructions workers, inspectors, appraisers, surveyors, Realtors, escrow officers, and lenders. Once homeowners close on their homes and settle in, there will be additional spending to furnish their new houses making them homes. Naturally, this continuing cycle contributes to the housing market’s overall impact on the economy.
The reduction of interest rates has boosted buyers’ confidence and real estate sales, which in turn helped expand the economic impact of housing. I also believe growing confidence levels and economic improvements will bring more activity to the real estate markets.
Real estate plays an integral role in the U.S. economy. Probably the best example is the 2008 financial crisis. Falling home prices initially triggered the downtown, but economists couldn’t agree on the severity of the roughly 4% price reduction. Most can agree on definitions of recessions, bear and bull markets, but the health of real estate markets is more difficult to quantify.
J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).