Home Building Industry
The home building industry or real estate industry is a very important sector to the economy of U. S. It stimulates the U. S economy both directly and indirectly. Direct impact is made when jobs are created, wages paid and tax revenues made. The indirect effect is felt as the demand for goods and services related to the industry are increased for instance lumber, insulation bricks and cement. The aim of the most entrepreneurs is to make profits and homebuilders are no exception. They are attracted by low interest rates.
Other things that they have to be put to consideration include the financial considerations, environmental factors as well as legal factors. Large established builders stand a better chance in the market in terms of their competitive advantage than smaller firms. Economic factors affecting the real estate industry include the demographic trends of the population. The numbers of adults in their prime age for instance between 25 and 44 years influence the demand for houses. Changes in the mortgage financing industry also influence the trends in this industry.
Finances are a vital factor in the real estate industry. Energy costs and property taxes also affect the home building industry. Increases in energy costs may lead to increased prices, which translate to lower demand. Most people would prefer using approximately 30% of their income on housing but with increased costs the households could raise it to 50%. Currently in the US most houses are left vacant, as the prices remain considerably high. Other added costs that would influence the trends in the real estate industry would result from building materials and labor.
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As the prices or costs of building materials increases so does the overall cost and price of housing resulting to low demand (William Poole, 2007). Consumer preferences affect the demand for houses or buildings. Demand for a certain type of housing would increase if people prefer it. It is the role of homebuilders to ensure that they provide quality and comfortable structures to attract people. This is done through vigorous innovation. Competition has increased as free of entry and exit is put in place. Builders have to consequently compete on the basis of location, reputation, quality, design and other amenities.
To finance their operation homebuilders may use credit from commercial banks while using their inventory homes as collateral. Larger firms will therefore stand a better chance in the market as they can get more finances as compared to the smaller firms. The housing market can categorized as per people’s taste, race, status of the family, it location, income and age. The real estate industry is comprised of both the residential sector as well as non-residential sector although the residential is more profound (http://www. construction. com/AboutUs/2006/HombuildersSurvey. pdf).
Fiscal policies that affect the real estate sector influence or change the cost of capital or the return to capital. Land use regulation and zoning restrictions may hinder the establishment of a real estate in a certain area while encouraging the establishment in another area. Changes in property taxes affect the profitability of a real estate firm. These taxes translate to increased cost, which are transferred to consumers in higher prices. With higher prices all other factors for instance incomes held constant, the demand for the houses declines. The reverse of this is true.
Lower property taxes will reduce construction costs making the industry attractive to consumers. To encourage non-residential housing, temporary tax credits can be put in place making it more favorable for commercial or industrial construction (Michael B, Colin L and Bryan M, 1998). A strong or stable financial environment is necessary as it enables all parties plan for the future. The number of unsold home relative to the current sales trend and trends in the prices indicate that there is higher supply than demand. Potential buyers may be delaying their purchases in hope that the prices will fall in future.
In the real estate industry the demand for houses or building structures is affected by its price. The price elasticity of demand is therefore relatively elastic. Price elasticity of supply refers to the responsiveness of the supply of commodity to the price of that commodity. The supply in the real estate is determined by the cost of land, labor, electricity and other building materials like cement. As their prices rise, the supply declines because they lead to increased costs that result to higher prices for consumers (Paul Emrath, 2005). Demographic factors affecting the demand for housing include the population size and growth.
Higher population translates to increased need or demand for housing. However other important factors like immigration, divorce rates and marriages should be considered. Housing takes a lengthy process and supply effects many not be responded to spontaneously. An increased demand may not be met immediately. The government monetary policies could have a great impact on the real estate industry. The Federal Reserve board may influence the money it lends to commercial banks by raising the interest rates. This discourages both the consumers and producers in this industry.
Potential and willing buyers may lack the finances and with limited chances to get loans they may not buy houses at all. On the other hand producers may also have their financial ability to expand jeopardized. Government agencies for instance the Federal Housing Association can affect the amount for money available to lenders for mortgage. The Federal government can influence the supply as well as value of land in a given location. It can either increase it or decrease it. High federal taxes hinder real estate industry investment. Income is a vital aspect in determining the kind of housing one is to choose.
Employment and wage levels are consequently important factors affecting the real estate industry. Demand for real estate declines as the job opportunities and wage levels drop. Consumer confidence is also critical in real estate industry. The rate of inflation combined with the availability of mortgage money affects consumer’s decision. Consumer confidence is associated with a stable economy that enables them plan for the future. The U. S federal government has already reduced the interest rates as a move to decrease the inflationary pressure and encourage or boost the real estate industry.
The declining in importance of the U. S dollar in the world market by and large affects people’s confidence. With lower confidence investment in the real estate industry declines (Steve Schifferes, 2007). A thriving real estate industry has spill over effects or positive externalities to the U. S economy. The industrial as well as the service sectors linked to it will also develop leading to the creation of employment in the country. They include the financial sector like mortgage banking, brokerage services, design and property management, and cement manufacturing industry.
The US economy can affect the success of the real estate industry. If it ensures effective and favorable regulation and taxation it can encourage or boost the industry. The federal government should also enhance the court systems so that contracts are enforced. Some mortgage firms have closed down due to poor underwriting procedures that ensure unsuitable mortgage for buyers. The federal government can counter them (Richard G. Lipsey, 1997). Increased GDP levels, employment levels and general increased income per capita characterize a growing economy.
This would see the success of real estate industry as people have the finances to fund their housing needs, which are basic necessities. A stable economy that shows its chances of growth in the in the future acts as an incentive to investment. The US dollar may have depreciated in value due to varying factors among them the world’s view of its leadership. By controlling the inflation the chances for an economic show down are eliminated. The federal government must therefore work to this effect. It can reduce or increase its spending depending on the prevailing economic condition (David L .
2004). To ensure that energy costs are manageable it can ensure that monopoly companies that influence the market do not take advantage of their monopoly power. It can also encourage home lending by buying mortgage from home lenders as securities that can be sold to investors. Problems in the mortgage financing led to the inability of lenders to replace funds putting buildings in to default and fore closure. Wage inequalities influences the real estate industry. Those with higher wages can afford decent housing while those without do not.
The economic influence that negatively affects the home building industry is increased interest rates. An economy that favors minimal inflation accessible credit and low interest rates favors the real estate industry as the consumer demand is increased Sami Abdella, 1972). Land is an important feature in this industry. It is immobile and scarce. In areas that are most favorable the prices of land are quite high due to the low supply and high demand. Homebuilders increase their prices in such places. Due to the limited nature of developable land they are faced by shortages.
The government intervention is seen as local governments regulate land control to foster growth land could be preserved or conserved thus restricted for home building. Immigrant movements in to US translate to an increased population and thus a potential to increase the demand for housing. Immigrants may be attracted to US by its positive economy they tend to look for new homes as soon as they relocate to the US. Home building industry is a source of government revenue. Professionals employed by this sector include lawyers, architects real estates and lenders. House prices affect the industry’s performance.
Declining house prices are not profitable to the investors. House prices have been decreasing causing a house slump since 2006.
William Poole. 2007. Real Estate in the U. S. Economy. Federal Reserve Bank of St. Louis. Retrieved on 19th February 2007 from http://stlouisfed. org/news/speeches/2007/10_09_07. html Deloitte and McGraw-Hill Construction A Survey of Homebuilders by Deloitte and McGraw-Hill Construction. Staying Competitive in Today’s Homebuilding Industry Retrieved on 19th February 2007 from http://www. construction. com/AboutUs/2006/HombuildersSurvey. pdf. Paul Emrath, 2005.
Home Building’s Direct Impact on the U. S. Economy In-Depth Analysis. Retrieved on 19th February 2007 from http://www. nahb. org/generic. aspx? genericContentID=44096 Steve Schifferes, 2007. Housing meltdown hits US economy. Retrieved on 19th February 2007 from http://news. bbc. co. uk/2/hi/business/7078492. stm Richard G. Lipsey. 1997. Macroeconomic Theory and Policy. Edward Elgar. David L, 2004. Western Booms, Bubbles and Busts in the Us Stock Market. Routledge publishers. 304 Sami Abdella, 1972. Macroeconomics. Rider College publishers. 99 pages Michael Ball, Colin Lizieri and Bryan Macgregor, 1998. The Economics of Commercial