A Brief Economic Overview of Real Estate Real estate has been significantly in decline since the summer of 2006. Home sales and home prices are declining. Inventories of unoccupied homes have increased and there has recently been a decline in real estate occupancy levels. Many economists are of the opinion that we have not yet reached the bottom of the decline of the “housing market”, which is one of the most important factors of the American economy. Recent statistics indicate that there is an increase in mortgage requests; at the same time, however, there is a decrease in permits and new start-ups which could impact the economy for several years to come. Furthermore, another worrying trend is the increase in home cancellations in the last 3-4 months. Elasticity of Demand and Supply Most Americans consider housing a necessity. “Necessities tend to have inelastic demands, while luxuries have elastic demands” (Mankiw, 2004, p. 90). Due to the slight change in price if the quantity demanded increases or decreases, the price elasticity of demand in the residential construction industry is inelastic. Similarly, the price elasticity of supply in the residential construction sector is also inelastic because price changes only slightly change the quantity supplied. In the residential construction sector, there are substitutes. Like cars, there are several homes to choose from that vary significantly in price. In an effort to protect themselves from the elements and protect their belongings, people typically invest a significant portion of their income by renting or owning a home. “Market prices depend on supply and demand, in particular on the elasticity of supply” (Frantantoni, 2005). As home prices rise, if builders increased the number of homes built – therefore available for sale – prices would eventually decline and perhaps decline as supply exceeds demand. Externalities There are several positive and negative externalities related to the residential construction sector. Positive externalities include: aesthetic amenities, barriers to mobility, smaller communities, greater political and educational involvement, as well as benefits for children and their families. Negative externalities include; overcrowding, destructive vision, envy and jealousy. According to Edward L. Glaeser and Jesse M. Shapiro (2002) “The economic literature points to three reasons why homeownership might create externalities.” First, homeowners have an invested interest in the property they own and the surrounding area; therefore, homeowners have more interest in the attractiveness of the community.