Real Estate and the Economy

Real estate generates over 28 percent of U.S. gross domestic product (GDP), creates jobs
for nearly 9 million Americans, and is the source of nearly 70 percent of local government
revenues. 2 The total contribution of the housing sector alone approaches 20 percent of GDP. 3
Because of the significant influence of real estate on the nation’s economy, investors on Wall
Street closely monitor real estate construction, construction permit activity, and real estate
sales figures. Housing starts and sales are widely viewed as leading economic indicators.
Land Use in the United States
The United States represents about 6 percent of the earth’s land area, or approximately
2.3 billion acres (3.5 million square miles). To give a sense of scale to an acre, a football
field, not including the end zone areas, is slightly more than one acre (1.1 acres). More
precisely, an acre is defined as 43,560 square feet, or about 209 feet square; there are 640
acres in one square mile. The size of a single-family residential lot is typically between
one-fifth and four-fifths of an acre.
It is estimated that the contiguous 48 states comprise 1.9 billion acres and that
71 percent of this acreage is in nonfederal, rural land uses. According to the 2003
National Resources Inventory Report, developed land represents approximately 6 percent
of the land in the continental United States (see Exhibit 1-1 ). Developed land consists of

Real Estate Markets and Participants

In the United States and many other countries, market competition serves to distribute

resources (i.e., goods, services, and capital) among the various users. The market’s forces

of demand and supply interact within the economy to determine the price at which goods,

capital, and services are exchanged and to whom they are allocated. Real estate resources are

allocated among its various users—individuals, households, businesses, and institutions—in

the real estate market. Real estate values derive from the interaction of three different sectors

in the economy: the “real” world, or user markets; the “financial” world, or capital markets;

and government. A brief discussion of each of these sectors is presented below.

User Markets

Real estate user markets are characterized by competition among users for physical

locations and space. As we will explain in Chapter 5, this competition determines who

gains the use of each parcel of land and how much they must bid for its use. The primary

participants in user markets are the potential occupants, both owner occupants and tenants,

or renters. Ultimately, the demand for real estate derives from the need that these

individuals, firms, and institutions have for convenient access to other locations, as well as

for shelter to accommodate their activities. Based on the financial positions of households

and firms and their wants and needs, they decide either to own and occupy property, or to

lease property from others. Thus, about two-thirds of U.S. households own their home,

and many businesses own their property, while most commercial real estate located in the

central business districts of U.S. cities is leased.