What is real estate? Why is it important?
Real estate is property in land and buildings. Essentially, people must have places to live and businesses must
have locations in order to operate. Residential real estate provides housing
for families, while commercial, industrial, and agricultural real estate create
spaces for jobs in various industries. Still more, the real estate industry
offers many career opportunities within itself. All in all, real estate income provides a
source of revenue for millions of people.
Real estate is a fundamental part of our national economy and comprises
a great portion of national wealth. According
to Charles F. Floyd and Marcus T. Allen, authors of Real Estate Principles Tenth Edition, real estate accounts for about 5 percent of the nation’s gross
domestic product and about 40 percent of gross private domestic investment. In
addition, land and structures comprise about 26 percent of the total assets of
households and about 33 percent of the total assets of businesses. Tangible
assets aside, many borrow against real estate assets through financial assets known
as mortgages and mortgage-backed securities.
To really truly grasp the importance of real estate in the
economy, it may be helpful to examine its role in what many consider to be the
worst financial crisis since the Great Depression. The United States economy is particularly sensitive to housing values. In the early 2000s, extremely
low interest rates stemming from the dotcom bust encouraged millions of people
to buy a home on cheap credit. Aggressive investment in mortgage-backed
securities and collateralized debt obligations led to pressure from Wall Street
for lax lending standards and subprime mortgages. Those that were once
unqualified candidates could now easily obtain a loan, causing an increase in demand
for housing and rapidly increasing home values. Investors leveraged their
returns on these financial instruments tied to real estate, arguing that home
prices nationwide had never fallen before. As housing prices and interest rates
continued to rise, many subprime borrowers found they could no longer afford their
mortgage payments. Many defaulted on their loans and millions of homes went in to
foreclosure. Investor demand for MBS’s and CDO’s based on subprime mortgages deteriorated
and massive losses forced lenders to tighten their borrower qualifications. Unfortunately,
the damage had been done. Demand for housing fell and prices took a nosedive.
The value of the mortgage-backed securities plummeted, severely damaging many
major financial concerns tied up in these securities and ultimately leading to a global financial crisis. To better understand the ongoing financial crisis and the role that real estate plays in it, see the video below.
Bottom line: Real estate is important. When real estate comes to a halt, so does a multi-billion dollar segment of our economy.
Bottom line: Real estate is important. When real estate comes to a halt, so does a multi-billion dollar segment of our economy.
So with all the hullabaloo surrounding the financial crisis and housing bubble burst, you are probably asking yourself "Why should I invest in real estate?" Let us look at some of the advantages of owning real estate as discussed in the articles listed below.
Advantages:
1. Capital Gains
Real Estate tends to go up in value, or appreciate. While the population continues to rise, more real estate is needed. Every year housing and real estate become more expensive as natural resources and energy become more expensive. Although appreciation can increase too much too fast, real estate tends to follow an upward trend.
2. Cash Flow
Real estate has the potential to generate income through rental properties.
3. Leverage
Leverage provides greater returns.
4. Tax Advantages
5. High Tangible Asset Value
Real estate is backed by a high level of tangible assets.
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