Real estate has traditionally provided a conservative investment for everyday Americans in the form of home ownership, and it forms the basis for large investment portfolios in the form of commercial real estate and investment properties. The real estate market is subject to influences by the larger economy in which the real estate exists, and by national influences. Monetary and fiscal policy at the national level influence prices and demand for real estate, while local prosperity or recession can greatly influence the value of real estate in a given area. This research examines recent inflation rates, interest rates and the North American Free Trade Agreement, and considers each of these with regard to real estate in general, and to real estate in Texas, in particular.
One definition of inflation is that it results when available volume and credit exceeds available goods and services (Sperandeo, August 16, 1993, p. 10). During inflationary times, prices are driven up by too many dollars chasing too few goods. From this standpoint, inflation measures the growth of an economy. However, too much inflation and the economy grows stagnant: prices increase faster than goods and services can be produced, shortages occur, interest rates soar and the economy slows down. For these reasons, some amount of inflation is necessary; it is the Federal Reserve's role (through monetary policy) and the government's role (through fiscal policy) to control inflation in order to keep the economy healthy and vibrant.
One of the most interesting aspects of inflation is not its actual measure, but its anticipated performance. Analysts in investment markets spend a large percentage of their time and resources engaged in anticipating how inflation will perform. During the early 1990s, inflation was low, at approximately 3 percent. In 1993, analysts began to sense that inflation would increase as the economy recovered from the recession that had...