The Evolution of Real Estate in the Economy
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Title: The Evolution of Real Estate in the Economy
Author(s): Dapeng Hu and Anthony Pennington-Cross
As we move into the "new economy," an economy based primarily on information, the fundamental structure of markets is changing. What is being produced and sold, how people get to work, and how we communicate are being revolutionized. Many argue that for three reasons, these changes are reducing the relevance and importance of real estate to the economy:
- the introduction of e-mail and web businesses makes it easier for workers to do their jobs in a variety of locations;
- firms also have new tools making it easier to sell goods from business to business without physically meeting at a market place; and
- the output of the new economy-information-is very amorphous, making the contribution of real estate as a factor of production unclear.
If firms and workers need to physically meet less often, then they should spread out, reducing the intensity of demand for real estate in urban centers. The net effect, this thinking goes, is that space or real estate has become a less important part of the production process and therefore the economy.
Consistent with this interpretation of the impact on an information-based economy, this paper shows that since the early 1980's, real estate holds a much smaller fraction of total U.S. wealth. In contrast, the role of real estate as an input to create goods and services in the economy has held steady from the late 1980s through the late 1990s. In fact, from 1993 on, the amount of output allocated to real estate has been increasing slowly. This finding directly conflicts with the idea that space and real estate have become less important. .
One explanation is that change in the economy over the last 20 years is not as straightforward as moving from an industrialized economy to an information-based economy, where place does not matter. Innovation has also occurred in the real estate industry itself. Some recent examples of this innovation include the increasing vertical integration of the real estate market (e.g., real estate agents becoming active in home selection and mortgage financing) as well as the creation of one stop shopping internet sites. .
However, the most significant innovation to-date in the real estate market is the securitization of mortgages. Mortgage-backed securities have grown from less than 10 percent of the total debt outstanding in 1985 to 18.6 percent by 1999. Real estate has become such an important part of the debt market that its share is approaching 50 percent. Debt innovation in the real estate industry has helped make real estate an even more important part of the financial market.
In sum, the declared demise of the importance of real estate to the economy is premature. The most significant and interesting question, as Dr. Joseph Gyourko points out in his Foreward, is the ongoing impact of these developments on the ability of real estate interests to control their own destiny in social and political conflicts.