An industry passes through a sequence of developments and downfalls either due to external factors or any internal grounds. Economic establishment helps to foster the growth of industries present in that particular economy. The role of industry in an economy signifies prosperity in terms of its advantage for respective stakeholders. The interrelated role of stakeholin relation to economic factors of production helps to determine the value and output of the industry. On these grounds industry goals, establishment and achievement are set in considering the prevailing and expected trend in the economy.
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The real estate industry, chosen for the report, is playing a very significant role in the growth of many other industries relating directly to the advancement in this industry or indirectly in association with direct affiliates of the real estate industry. The real estate industry defines the solutions for the shelter need of people based on their desired behavior. Therefore in considering the essential demand for homes in the economy many people started investing in this particular industry for its higher and consolidated returns. People’s increased purchasing power and saving patterns lead to the advancement in the demand for homes. Evaluation of this demand arising pattern for homes unfolds the reasons being greater employment for people in U.S. economy, therefore, this business stern leads to the unremarkable growth in lesser span of time. Many other business industries having a direct relation with this real estate industry came into existence and start accomplishing their own goals. These include the banking sector, financial institutions, mortgage property providers, construction material industry, and many middle-level sectors arising.
In consideration of people need for homes many construction companies and builders started playing their active role in providing solutions for shelter needs. They offered multiple solutions for the need satisfaction in form of various home types from low level income group houses to posh locality formations. These homes were provided in easy installments and in one time down payment also so that people can acquire benefits depending on their capabilities. Many financial institutions such as banks and corporate real estate brokers offered their services and products by giving installment package plan for home with easy and understandable terms and conditions (Norwood, 2009). Some of the market players offered attractive deals to people such that they need to pay only interest on the cost of house for initial few years. Such strategies leads to a demand building market for real estate with different requirements based on the earning and savings level. This demand building approach was in fact done to achieve profits in long term and escort huge investments in the industry by market players (Tyson, 2005). This desired course of action resulted in financial market growth as banks actively conjoin their goals with the real estate industry progress.
The demand arose from such stratagem was appearing to generate a big sum of profits for investors in the industry that include builders and developers, banks, financial institutions, middle line people etc. As people need for home was consistent from time therefore demand for homes was price elastic in comparison to market prevailing factors of employment and economy growth. Boost in economy created employment for many people therefore impacting their living standards. People who were capable enough to support their increased demand for quality standard of life preferred to start by shifting their homes in newly built better homes. At service provider end, banks offered financing services (such as mortgage and loans) to these buyers hence their role also had positive impact in the growth of industry. Since it takes time to build a house and in special cases of financier (financial institution) involvement approval of loan from facilitators, supply becomes inelastic in short run. Whereas due to change in demand market respond positively therefore supply is elastic in long run of operations (Mankiw, 2004).
The main source of funding for property purchase is mortgage loan offered mainly by banks in which property (building or land) itself appears as collateral. Banks offer these loans at pre-agreed mark-up rates inclusive of installment payment which if borrower does not pay bank by the court approval can sell the property to another buyer to cover up its money. Builders and constructors also get advantage by this method as they acquire the money for their real estate offering product on behalf of customers by the bank which is utilized by them for construction purposes. Real estate agents also work with assets planning managers to sell off the property acquired to set off the property payment.
These means in industry offered many positive as well as negative aspects for economy. In assessing of positive sights for the industry it created a boost in the economy and generated a business of trillion dollars that ultimately transferred at each level and every stakeholder in the industry get benefited from it in the form of profit share. Employment level increase determines the influence of industry in setting standards for the people getting affected directly with it and influenced by the economic turns of the home building industry (Knox, 2009). Home building industry demand is derived from the consumer demand therefore supply also increases with more investment in the industry by builders and contractors (Tyson, 2005). House building demand is price elastic as it is dependant on income level and subsequently on savings level of household. Therefore consideration needs to be given by builders and financial institution when offering a house to customer with specific price. Interest rates prevailing in the economy also determine the price of a house as bank’s mark up is dependant on it (NAHB, 2009). Employment level in economy positively influences the demand followed by supply of houses by contractors and builders to regulate the prices and demand level at limited investment level.
There are few negative externalities also present in home building industry. Protest by local people who are forced to sell their land or building to builder for construction of shopping malls and trade centre. Housing schemes in a particular region positive inclines the value of that region whereas fertile land has been consumed for such housing schemes that instead could be used for other beneficial purpose. Barren land construction sites are very productive for housing schemes adjoining any industrial sector; people residing near such industrial region can easily access their workplace. Therefore it also benefits the economy trend of employment while going for production possibility frontier.
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Current unemployment in the economy and increasing interest rates has negatively affected the industry trend of demand and supply (Knakal, 2009). Global downturn that started at the end of 2007 severely hit the established grown economies; ultimately followed to impact the demand at consumer end cycle (Knox, 2009). Therefore, even big corporations such as General Motors also laid off their workforce to cut down their expenses. At various place productive employees pay were cut down to minimal extent only to have retention in the market and sustainability of company in crisis. This leads to decrease in demand of daily life products and badly affected the luxury products demand of people. To cover the entropy in the economy interest rates were slightly raised by the government which decreased the demand for new houses throughout the country ultimately financial institutions were not able to receive timely payments from the customers; hence majority of houses were placed on local agents list for resale to cover up initial cost. This increased supply of houses in the market and lesser demand by people due to low income level and unemployment eventually lower down the prices of houses (in all ranges and types) (Knakal, 2009). Prices leverage appears to be seen in the economy as soon as government fiscal policies and bail out packages for various industries is given.
Analyzing the monetary and fiscal policies by the government and state bank urges the economic recession lead ways that in due course end up with the credit crunch in the economy (NAHB, 2009). Main emphasis placed is to consider the factors that lead to such a situation. Government’s debts level and spending patterns on economic recovery recently are the reasons for raised interest rates. Mortgage loan pricing eventually increases due to change in mark up on loans to cover up debts. Considering the positive aspect of which people have started invest in treasury bills and bonds that endow financial institutions and entrepreneurs with the opportunity of covering up their credit level through people’s return on investment. Home building industry growth has been slowed down due to credit crunch and lesser demand of houses by people in relation to supply of houses currently in the market. This negative growth of approx 6.3% in single unit houses and 8.3% for building permits the weakest position of the company in stipulations of monetary factors (NAHB, 2008).
Economy growth is directly dependant on the growth of real estate/house building industry as it creates employment and offer business for many industries that are discuss in the above text. There economy of any country boost when it supports its house building industry for revenue generation. It offers employment to people that ultimately benefits their increased income level and saving pattern leads to adoption of luxury products. Despite the ambiguity of market economic position people demand for new homes will still be present; inconsistently at low level with quite large fluctuations in the prices. This offers house building business to sustain in the market by covering up their marginal cost, as total sum of money invested and the return can be achieved on revival of global economy. The growth of the industry has declined due to weak fiscal policies with low consideration given for contingency plan and back-outs by investor.
In appraisal of current government fiscal policies, market factors and economy revival conditions are getting better for house building industry. Government bail out packages for different industries such as banks will help to set off their debts and crunch in the market will decrease (Rayne, 2008). So in assessment of these market condition foreclosures of industry divulge the borrowers and creditors role for the economy growth. Borrowers due to lack of enough money are selling out their homes taken from financial institutions on lease; whereas homes detained by banks to recover their money have resulted in plenty of houses in the market for sale (NC, 2009). These negative turn in the economy decreased the prices of houses and back-off the new comers in the industry form investing. Existing developers have cancelled out their upcoming house building projects as they are unable to recover their investment return and settle the financing charges of fund generation that put their position at stake.
In consideration of prevailing market factors and global act by G20 countries to resolve the current economic recession problem will help to stable the growth in economy in upcoming year. Till then economy may still face a deep crunch for housing industry value and price setting for increase market value. Market value of houses is not determined only considering the condition of the physical entity whereas economic situation, demand for houses, supply level, people economic condition, savings level and interest of upcoming investor in the industry also shows the industry growth.
Housing industry is relentlessly exposed to economic growth and downfall that defines the value of property and building. Recent global downturn of the economies has resulted in decreasing the value of houses prices due to increased supply and lesser demand. People income level and spending pattern was negatively influenced due to unemployment level in the economy that resulted in their less spending on housing property. Whereas rise on mortgage loan mark up due to increase in interest rates have made financial institutions and banks which offered houses to people on easy installment package to suffer with credit crunch. Proper system and package is required to benefit the industry as whole economy is dependant on the growth of house building industry.
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Knakal, Robert. (2009). How Unemployment and Inflation could affect Commercial Real Estate Values. Web.
Knox, Noelle. (2009). Home builders’ foundations shift with shaky market.
Mankiw, N. G. (2004). Principles of economics. Edition: 3. Chicago, IL: Thomson South-Western Publisher.
NAHB News Alerts. (2008). Housing Starts and Permits Continue to Fall. Web.
NAHB. (2009). The Financial Markets Still Need Time to Heal. Web.
NC Property Solutions. (2009). Real Estate Value Foreclosures. Web.
Norwood, Graham. (2009). The Housing Downturn: Picking Up the Pieces: A Guide for Estate Agents and Developers. Edition: 1. Publisher Elsevier.
Rayne, Imogen. (2008). How the Economy is affected by the Home-Building Market. Web.
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Tyson, Eric. (2005). Investing for Dummies. Edition: 4. Publisher For Dummies.