Eco 372 - Product Purchases and the Economy

Product Purchases and the Economy

Donna LoRusso

Eco/372

May 3, 2016

Steven Krohn

Product Purchases and the Economy

The purchase of real estate comprises of a collection of commodities that are influenced by conditions of the economy. Most individuals would agree that the purchase of a house is a major investment anf 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 piece of residential real estate and analyze the primary economic indications related to this industry.

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 defined the total number of new residential homes 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 affordable if all other factors remain equal. High demand and densely populated areas must see growth in housing starts in order to maintain homes 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 levels 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.