Real estate is in everything we do. It affects our lives in various ways. Ultimately we live in real estate, we farm on it, we work on it and build on it, fly away from and return to it. It is an integral part of our lives.
The physical importance is complemented by the impact it has on the economy and our lives. Commercial activities and industrial activities rely heavily on land and its natural resources which in turn is real estate.
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Many of us are involved in one way or the other into real estate. There are a lot of people who depend on real estate as a source of livelihood such as sales agents, brokers, manufacturers, and paint purveyors. Millions of people are engaged directly in construction activities in the United States, with millions of others providing them with their materials and other essential services.
It was shown the importance of real estate in 2007 when the economic crisis that began in 2007. The overall real estate market declined there was a massive increase in foreclosures and many people were unable to sell and refinance their homes. The overall situation was bad until 2012 showing little hope for a reduction in the rate of foreclosure. The sand belts, that is; Florida, Nevada Arizona and the states affected by hurricane Sandy were exceptions to this reduction. The rate of foreclosures reduced and continued into 2013 and 2014. This was due to the acceptance of short sales by lenders. Unlike other economic recoveries, the rate of employment remains low. There has been a gradual increase in housing constructions which is a good thing for the overall economy.
The nature of real estate finance
The construction industry is important to the economic well-being and so is important to real estate finance. Changes in its activities soon affect everybody. A slowdown in building soon leads to a slowdown and cutback, while increased activity causes an increase in production and services In the many areas connected to the industry. There are a few constructions done which are not paid for by the loan. Most real estate activity relies on borrowed funds.
There is a popular saying “As goes the construction industry so goes the economy” which was aptly shown in the financial crisis of 2007. The number of housing starts started falling especially the single-family homes. The first sign of recovery was in 2013/2014 when single-family buildings started to increase and multifamily starts reached their highest level since 1998.
Credit system economy
It is a fact that we operate a credit economy. We postpone paying for things by using our credit card and charge accounts. Credit expands our ability to get goods and in essence, makes our lines better.
The credit concept of enjoying goods while still paying for them is the basis of real estate finance. The financing of real estate involves a large sum of money which most people don't have at once so they have to collect a loan that takes a long time to repay. Instead of revolving charges or 90-day credit loans for hundreds of thousands real estate loans deal with thousands of dollars repayable for up to 40 years.
The long-term nature of real estate loans complements the holding profile of the financial lenders, that is; the repayment of loans is regularly made monthly and so the lenders can rhythmically collect the debt and redistribute it which in turn helps in continuous economic growth.
The rhythm however can be interrupted when there is prolonged disintermediation; that is, that is when there are more funds withdrawn from these financial institutions than there are deposited. This causes a total loss in deposits and a reduction in lending which will in turn affect the economy. There is continuous and strong competition for the use of money by the government, individuals, and industry. That is why the Federal Reserve (the Fed) and the secondary market are needed to help in constant cash flow.
Financing relationships
The nature of financing relationships can be described in three ways. in its simplest form, it is the promising of a property to the lender (the collateral) as an assurance that the loan collected will be paid according to the contract and the terms of the loan contract will be satisfied. If a borrower defaults the repayment agreement the lender is statutorily allowed to sell the property used as collateral and try to get the balance owed.
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