Due Week 9, worth 175 pointsThis assignment is aligned to this course outcome:Apply macroeconomic concepts to current and personal economic events and decisions.In addition to writing about macroecono

Real Estate Economic Brief

Franklin Mejias

Principles of Economics (ECO 100)

Strayer University

Dr. Jean Fonkoua

February 4, 2019

The term real estate is very common nowadays, but only a few can answer the exact meaning of this term. The word real is an English word that means "true or existing"; on the other hand; the estate is a Latin term that is used for "interest." Combining the whole term "real state" means the value of the interest that an owner of the property charges. The most popular form of real state in the U.S is homeownership. The citizens of the U.S most commonly pay for financing their homes. For home financing, they take loans in term of mortgage from banks, and other financial institutions. The nature and treatment of commercial real estate are entirely different from buying a house since the profitability or interest involved in commercial real estate is calculated by per square feet (1).

The urbanization in the world has boosted the business of real estate, and it has been increasing the wealth of real state owners on one side and contributing to the success of the economy on the other side. Yun, (2016) provides the figures of real estate's contribution to the U.S economy that was approximately $532 billion for the year 2016 (2). The real estate industry runs under the oligopoly market structure. The competitors or opponents are the key players in deciding the pricing of a property. The maximization of profit purely depends upon competition rather aggression (3).

The people will find it comfortable if the price of real estate decreases. There is nobody who would not like to buy a home at a lower price. A lower price for a home can be an ideal situation, but its effects on the economy are adverse. For example, a decrease in real estate price will lead to a decrease in the sale of real estate and vice versa. There will be a decrease in consumer spending also since only fewer loans for home equity will be entertained. A decrease in consumer spending causes a decrease in other sectors of the economy. In such a situation, there will be a continuous cycle of cost-cutting, i.e., the firing of employees from the jobs. This situation will cause a rise in unemployment. In such a situation, the Federal Reserve moves ahead and reduces the rate of interest by indicating these situations as a red flag. The recession can take place in the economy if the Federal Reserve ignores these situations (2).

There was an addition of almost $1.9 trillion in the U.S housing market that increased the total value of the real estate market to $33.3 trillion by the end of 2018. Comparing the facts from 2012 when the housing market crashed this 6.2% increase is up $10.9 trillion (4).

There is a constant rise in the price of housing, and most of the economic experts believe that if this rise continues there is an expectation of a market crash within two years. This is merely an assumption, but it is true that lending standards are not universal and only five percent of market loans are subprime (2). The application of mortgage in the market requires certain additional requirements to be fulfilled. The apprehension of market crashing can decrease if the owners of home keep continuing not to take out as many loans for home equity and only a few people file for bankruptcy (2).

The role of government regulation for the real estate industry is vital since it not only protects the property of homeowners but also ensures that particular areas are under construction as specified. The zoning laws protect the rights of homeowners since they do not allow night club to be built next to a house in an uptown locality. The factors that impact the value of a property include school, superstore, transportation, fire, and police department (5). The ignorance of the government in these facilities affects the growth of a city regarding rent, buy and sell of the property. The areas having high taxes on the property do not mean that living in those areas is not affordable. The people who have the affordability to buy a house in a locality where certain facilities are available will prefer to process irrespective of high property tax rates.

Sources

1. Diop, M. (2017). Real Estate Investments, Product Market Competition and Stock Returns. Real Estate Economics, 46(2), 291-333. doi: 10.1111/1540-6229.12201

2. Yun, L. (2016). Why Homeownership Matters. Retrieved from https://www.forbes.com/sites/lawrenceyun/2016/08/12/why-homeownership-matters/#441d39e3480f

3. Beck, J., Scott, F., & Yelowitz, A. (2012). Concentration and Market Structure in Local Real Estate Markets. Real Estate Economics, 40(3), 422-460. doi: 10.1111/j.1540-6229.2011.00322.x

4. Lloyd, A. (2019). U.S. housing market value climbs to $33.3 trillion in 2018. Retrieved from https://www.housingwire.com/articles/47847-us-housing-market-value-climbs-to-333-trillion-in-2018

5. Nam, T., & Oh, S. (2013). Recourse Mortgage Law and Asset Substitution: Evidence from the Housing Bubble. SSRN Electronic Journal. doi: 10.2139/ssrn.2316539