Product Purchases and the Economy – Introduction
The purchase of real estate comprises a collection of commodities that is are influenced by the conditions of the economy. Most individuals would agree that the purchase of a house is a major investment and trends in the underlying economy can lead to both positive and negative outcomes. The last major recession from 2006-2009 highlighted the importance of real estate within the American economic system. At the moment the real estate market and financial system collapsed, it created a fallout of consequences that slowed down production throughout the entire global economic system. The goal of this essay is to focus on the economic effects of purchasing a new price of residential real estate and analyze the primary economic indications related to this industry.
- Student: Lars
- Textbook: The Dynamics of Macroeconomics
- Course: ECO 372
Select a product in which the demand for the product is clearly affected by the strength or weakness of the overall economy in one of these categories: Real Estate, Transportation, or Travel.
Identify and define two economic indicators that reflect the strength of the economy (e.g. real GDP, unemployment rate, inflation rate, interest rate, and/or housing starts).
With these economic indicators in mind, how has the economy affected the demand for and supply of your selected product over the last 2 years? (Provide specific data and sources to confirm your notions).
Explain the impact on the price of the product and your decision on whether or not to buy the product.
Economic Indicators in Residential Real Estate
The economic catalysts of the residential real estate market are extensive and complicated, but there are two main indicators that can be singled out. First, new housing starts can be defined the total number of new residential homes that have been awarded building permits by local municipalities. At times when this metric is on the rise, it shows the growth of total housing supply that will cause homes to become more affortable if all other factors remain equal. High demand and densely populated areas must see growth in housing starts in order to maintain home prices at affordable levels (Gabriel 2015). In addition, a rise in new housing represents confidence within homebuilder corporations and that they can operate their businesses profitably. For the vast majority of homebuilders, profitability is only possible if middle-class Americans have access to mortgage lending.
The next identified economic indicator for real estate is the national unemployment rate. The nation’s unemployment rate is simply the percentage of the population that is not working, but actively seeking full-time employment in the workplace. Most individuals hope to obtain a mortgage to pay for a home, but they typically need to have stable employment or another steady stream of income. When the unemployment rate is on the rise, it means a lower number of individuals able to purchase homes resulting from a lack of mortgage lending opportunity. As a result, this does not provide homebuilders with confidence to move capital into new developments, causing supply to remain at low levels. This is a slow process and the value of the stock market generally recovers before the real estate market after a recession. To put this another way, the collective industry must see a recovery to have the ability to provide the jobs required to push up demand in the real estate market.
Effects on Housing over the Last Two Years
The last two years have been characterized by rapid growth in housing that has not been matched in over a decade, but this trend appears to be slowing down in 2016. At the end of quarter 4 in 2016, new housing starts were at their highest rate since 2007 (U.S. Bureau of Labor Statistics 2015). In large part, Americans have managed to recover from the past recession and gain access to unconventional mortgage financing. This has enabled some cities with strong job prospects to experience a rapid hike in real estate prices. Most notably, the cities of San Francisco, CA, Boise, ID, and Lincoln, NE are experiencing fast urban growth as steady flow of technology careers have become available. New housing starts in these areas are focused mostly in downtown disticts, in comparison to the suburbs. This is evidence of a shift in buyer demand for housing towards densely populated areas (Gabriel 2015). Many developers and city planners are responding to this demand by constructing extensive high-rise homes.
But let’s not forget about unemployment – the singple largest factor contributing to the housing market is the unemployment rate. Unemployment has at its highest levels around 10.0% in October 2009, but it has declined to 5.0% as of March 2016 (U.S. Bureau of Labor Statistics 2016). This positive change in employment has infused banks with the confidence to lend money with less money down and higher risk profiles. If the employment rate stays strong, we can expect housing to be stable as a result.
Effects on the Price of Housing
Home prices have seen a quick recovery in prices since the bottom of the recession. A surge in demand is being seen in many urban areas where it is causing gentrification in large cities and pushing up prices where supply is low. For example, in New York City the rise in pricing has motivated high net worth individuals to but and renovate real estate in low-income neighborhoods, thus causing rent prices to increase dramatically. This gentrification displaces the low income residents by and causes them to move out to neighborhoods outside the city. Economically, this leads to higher real estate prices across the board. Home ownership in ultra-high demand areas like New York and Los Angeles are only available to the wealthy and/or established rent-controlled residents. With minimal physical space for expansion, it is highly unlikely that that real estate prices will go down in these areas in the near future.
Applying this Knowledge to the Workplace
The dynamics of the housing market are closely related to interactions in the workplace. As a person progresses up the corporate ladder, he or she will need to navigate the supply and demand characteristics of job openings in their field. It is crucial to demonstrate value for a position when competing with a large number of applicants. The fundamental principals of economics can be applied to strategic business cunning, such the marketing or a product. If the strategic goal is to keep the price of a product as high as possible, then the brand should limit availability. In contrast, when the strategic goal is to sell a high quantity, the brand must increase output to the lowest acceptable operating margin.
In conclusion, the forces that move supply and demand are clearly visible in the American housing market. Over the last decade, the market has been highly volatile as a result of the global financial crunch and subprime mortgage crisis. Identical economic factors will continue to cause price and value variance in the real estate market, constantly influencing the microeconomic decisions of consumers.
Gabriel, S., & Rosenthal, S. (2015). The Boom, the Bust, and the Future of Homeownership. Real Estate Economics. Volume 43, Issue 2, 2015
U.S. Bureau of Labor Statistics. (2016). Labor Force Statistics from the Current Population Survey.