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Overbuilding, real estate lending decisions, and the regional economic base

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Abstract

The primary purpose of this paper is to evaluate the causes of overbuilding in the context of economic base theory. A second and closely related purpose is to determine if the economic base multiplier effect is stronger in the long run. Construction decisions depend on the strength of the local economy. Since basic activity is highly cyclical, if there are significant lags in the multiplier process running from basic to nonbasic sectors, then growth in non-basic employment will continue when the basic sector slows or declines. Hence, overbuilding may be, in part, a result of false signals about future growth in the local economy to builders, developers and lenders at the time a project is conceived. In addition, one of the important sources of the lags in the multiplier process is the construction sector. Potential solutions to overbuilding are discussed in an economic base context. The implications for bank regulation, bank lending and feasibility analysis are discussed.

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Authors and Affiliations

  1. Department of Finance, College of Business, Florida Atlantic University, 33431, Boca Raton, FL

    James E. Mcnulty

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  1. James E. Mcnulty
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Mcnulty, J.E. Overbuilding, real estate lending decisions, and the regional economic base. J Real Estate Finan Econ 11, 37–53 (1995). https://doi.org/10.1007/BF01097935

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