Question

Commercial banks have become increasingly involved in real estate market. Plot the percent change from a year ago of real estate loans made by commercial banks (FRED code: REALLN) and discuss the relationship between the booms and busts in real estate lending and the expansions and recessions of the U.S. economy ?

Answer 1

Broadly speaking, real estate lending and the US economy are directly related. Real estate lending tends to boom when the US economy is expanding, and tends to bust when the US economy is in recession. This is true of most expansion / recession cycles in the last century, including the Great Depression, and the current recession.

Real estate is a very important part of the economy as real estate represents a significant portion of the wealth in the economy. Both commercial real estate (offices, malls, commercial centers, hotels etc.) and residential real estate (homes) are directly affected by the business cycle. Interest rates, business confidence, inflation expectations, are the factors that affect the business cycle and real estate sector directly. The economy and the real estate sector are closely interlinked due to these factors. In fact, both the real estate sector and the overall economy affect each other simultaneously, and an expansion/ recession in the economy can trigger a boom/bust in real estate lending, and vice versa.