Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Economic Expansion Bodes Well For Real Estate Recovery

Written by Than Merrill

With one of the worst depressions in U.S. history officially behind us, the entire economy appears primed for a significant recovery. Perhaps even more encouraging, however, is the fact that the second quarter of 2014 was the beneficiary of vast economic improvement. From April to June, the U.S. economy grew at its fastest pace in almost three years. The broad base of activity experienced in the second quarter bodes well for the rest of the year, as those familiar with the state of the economy are projecting significant improvements sooner rather than later. At its current rate, the expansion of the economy is expected to have a beneficial impact on the entire housing sector.

As a result of the expansion, the Commerce Department reevaluated their projections of the state of our economy. As recently as last week, officials raised their estimates of gross domestic product (GDP), as to reflect a 4.6 percent increase in the annual rate of expansion. With the change, the second quarter of this year represents the best economic performance since the fourth quarter of 2011. In other words, businesses are demonstrating an increased propensity for healthy spending and export growth continues to show strong gains.

While exact numbers have yet to be determined, the healthy progression from the second quarter should translate very well into the third quarter. For all intents and purposes, the third quarter should benefit immensely from the proceeding months. Growth estimates for the July-September quarter range as high as a 3.6 percent pace. Should that be the case, businesses across every industry should experience a boon. The housing sector, in particular, should benefit immensely from a strengthened economic foundation.

America’s GDP, one of the strongest economic indicators, was previously estimated to have advanced at a 4.2 percent rate in the second quarter. The revision was in line with Wall Street’s expectations. The economy contracted at a 2.1 percent pace in the first quarter. However, with the exception of consumer spending, upward revisions were made in every category.

Of the revisions made to economic forecasts, business spending is perhaps the most encouraging. In fact, projections reflecting business spending on equipment was raised from a rate of 10.7 percent to 11.2 percent. Moreover, business continued to invest more in nonresidential structures. More money was also allocated to research and development, suggesting businesses are are more comfortable with the direction they are headed.

In association with business spending, domestic demand experienced similar growth. Originally projected to increase at a pace of 3.1 percent, domestic demand is now projected to increase by as much as 3.4 percent. The revised rate of domestic demand is the fastest pace since the second quarter of 2010. As such, domestic demand should suggest that the recovery is stronger than originally anticipated. Subsequently, the revision supports the robust rate of job growth and a noticeable decline in the unemployment rate. Each of these factors account for the strengthening labor force. In turn, the strong labor market performance during the quarter was also supported by a surge in gross domestic income, which measures the income side of the growth ledger. Gross domestic income increased at a rate of 5.2 percent, which was a whole half point increase from the previously reported 4.7 percent pace.

Businesses accumulated $84.8 billion worth of inventory in the second quarter, a bit more than the previously reported $83.9 billion. That saw restocking contributing 1.42 percentage points to GDP growth rather than 1.39 percentage points.

Recent revisions to the outlook of the entire economy suggest the recovery has gained significant traction. Having said that, the housing sector should benefit immensely. As we enter into the fourth quarter of 2014, housing market related spending has already received an upward revision. Businesses have already expressed confidence in the housing sector, as an influx of millennial spending is forecasted to improve the entire industry.

It has been said that millennials hold the key to the housing sector recovery. If that is the case, things should continue to improve for the foreseeable future. In the next few years, millennials are expected to actively participate in the housing sector. With increased job growth and a lower unemployment rate, an entire population can finally contribute to what was a very difficult market to participate in for the better part of a decade. Their presence is the catalyst for a chain of events that must take place in a healthy market. With their participation, more homeowners will be awarded the opportunity to trade up. According to the National Association of Realtors (NAR), approximately 27 percent of the existing-home sales in May involved first-time buyers compared with an average of 35 percent dating back to October 2008. With those numbers expected to increase, the housing sector should be in store for a period of prosperity.