The Crash of the Housing Market and Its Effects on the Labour Force - Essay Example

The Crash of the Housing Market and its Effects on the Labour Force The United s crash of the housing market wasan unconstructive event that transpired and led to a financial crisis, as well as a subsequent recession, which started in 2008. The occurrence, officially referred to as the subprime mortgage crisis, was typified by an increase in subprime mortgage foreclosures and delinquencies and the resulting drop of market securities backed by alleged mortgages (Fried 23). These MBS and CDO – mortgage-backed securities and collateralised debt obligations, respectively, formerly granted appealing rates of return because of the greater rates on the mortgages, but the slightly lower credit quality eventually lead to massive defaults. Whereas factors of the financial crisis became clearer during 2007, a number of major financial organisations collapsed in September, 2008, with considerable interference in the credit flow of these organisations and their consumers, along with the start of a harsh global financial crisis (recession) (Lemke and Lins 13). The financial turmoil had long-lasting effects to the United States and European financial systems. United States, in particular, fell into a deep recession with almost 9 million jobs lost from 2008 to 2009, nearly 6 percent of the nation’s workforce (Lewis 32). One lost yield due to the crisis was estimated to be at 40 percent of 2007’s GDP. The housing prices in the United States fell almost 30% on average, and the nation’s stock market dropped by 50% by 2009. This paper will discuss how this great housing crisis affected the United States labour force and also the jobs, which were hit least and hardest. The paper will discuss the jobs that are recovering fastest and the ones that are recovering slowest. There were numerous reasons why the subprime mortgage of 2007 took place. The boom and bust of the American housing industry, high-risk housing loans and borrowing/lending practices, homeowners’ speculations and deprived securitization practices are some of the main issues that led to this occurrence (Wall 5). Other reasons include, inaccurate credit ratings, poor governmental regulations (such as declined rule of financial institutions, lack of policies to endorse affordable housing, poor local and state governmental programs and mark-to-market accounting principle), role of Freddie Mac and Fannie Mae, poor policies by the Federal Reserve (American central bank), high debt levels and incentives of financial institution, credit default swaps, the trade deficit, technology and globalisation and finally the boom and subside of the shadow banking schemes (Wall 5). As from 1997 to 2006, the peak period of the American housing bubble, the value of a normal American house went up by 124% (Wallison 51). Between 1980 and 2001, the ratio of normal home values to normal household salary, also known as the measure of someone’s capacity to purchase a house, shifted from 2.9 to 3.1 (Wallison 51). By 2005, the ratio had increased to 4.0, and, by 2006, it hit a high of 4.6. This housing bubble made fairly a few property holders refinance their homes at much lower interest rates or back customer spending through taking out other mortgages secured through the price appreciation. The United States household balance, as a fraction of yearly disposable personal revenue, was a stunning 127% by 2007, against 77%, in 1990 (Wallison 51). Effects on the Labour Force The ILO estimated that roughly 20 million positions will have been lost by the close of 2009 because of the financial crisis, particularly in the construction, financial services, real estate and auto industry, bringing world joblessness rate over 200 million for the initial time (Wallison 56). The number of unemployed individuals the world over was over 50 million, in 2009, as the world recession intensified. By the end of 2007, the United States joblessness rate was 4.9%. By late 2009, the rate had hit a high of 10.1% (Wallison 56). A wider measure of the unemployment rate in the United States, which took into account slightly attached employee, part-time workers, as well as some discouraged employees, was 16.3% (Wallison 56). However, in July, 2009, much fewer were lost than critics had expected, dropping the unemployment by just 0.1%, from 9.5% to 9.4%. In August, 2009, even fewer jobs were lost, 216,000, a happening which was perceived as the lowest amount of jobs lost as from September 2008, but the joblessness rate still increased to 9.7%. Media reports, in October, 2009, broadcasted that some firms who cut jobs because of the financial slump are starting to hire them back. More lately, financial experts, in January, 2010, claimed that financial growth in the United States was back to its normal rate in the fourth quarter of 2009 (Wallison 57). Others predicted that restricted job growth started in the spring of 2010. Many employed, as well as unemployed Americans, were faced with strict budgets, risk of losing their homes and reduced access to credit. The American workforce and also those who had lost their jobs were restricted from accessing their health funds, education savings and retirement funds (Wallison 57). A majority of reduced-hour workers and also unemployed individuals are losing their healthcare insurance as insurance coverage of healthcare is normally linked to employment, and; therefore, household are facing extra financial stress in case they or their family member fall sick. With males losing a disproportionate amount of jobs, households are also gradually depending on the female’s substantially lowering incomes for financial assistance (Fried 34). In a normal dual-earner American household, women make 35% of their household’s income. In addition, where females normal make only 78 cents for every dollar that males make and normally do not get health insurance benefits, households are gradually challenged to live on a fraction of the household’s earnings (Fried 34). Even though, states customarily assisted in services such as healthcare coverage to deprived or low earning household, 21 states restricted eligibility for low-earning households owing to the widespread unemployment. Another effect to the workforce due to the subprime mortgage crisis is increased mental and physical stress to the American labour force (Fried 34). 8 in every 10 American employee argued that the financial crisis caused a considerable amount of stress (mental or physical) to them. Half of the American workforce claimed that they were stressed with the fact that they would not be in a position provide for their families (Fried 34). Many workers were working extremely hard and long compared to the way they used to, forgoing time off and vacations, contributing to their stress levels. Financial-related stress led to increased reporting of anger and bad temper, fatigue, tightening chest, feeling depressed or anxious and headaches. Jobs Affected by the Subprime Mortgage Crisis The ILO estimated that roughly 20 million positions will have been lost by the close of 2009 because of the financial crisis, particularly in the construction, financial services, real estate and auto industry. According to Wall (7), between August, 2007, and May, 2008, financial institutions dismissed over 34,000 workers. In June, job cut statements went on with Citigroup releasing an extra 9,000 workers for the rest of 2008 (Wall 7). Also, back in February, 2008, Citigroup had cut 4,200 positions. In addition, Merrill Lynch, in April, stated that it intended to cut 2,900 positions by the close of 2008 (Wall 7). At Bear Stearns, there were panics that a shocking half of the 15,000 positions could be removed soon after JPMorgan Chase finalises its procurement. In addition, that month, Wachovia removed more than 500 investment banker jobs, Washington Mutual slashed its payroll by over 3,000 workers and the media reported that RBS might slush 7,000 job positions globally (Wall 7). According to the U.S. Department of Labour, from September, 2007, to September, 2008, financial institutions had cut more than 65,400 job positions in the United States alone (Wall 8). However, the industries that were least hit by this crisis include government, information, mining and logging, transportation and warehousing, wholesale trade, nondurable goods and education and health services. The funny this is that even though people were complaining of how they would settle for their health coverage, the health industry still boomed (Lemke 45). Unlike other industries that were least affected by the subprime mortgage crisis, the education and health industries were barely scratched. Industries that are Recovering the Fastest and Slowest The institutions that made a quick recovery after the financial turmoil include the financial sector and auto industry (Wallison 67). Media reports claimed that the auto industry was seeking more workers, in 2010, after the mass laying off of workers, in 2009, which saw the have inadequate personnel. GM, in particular, opened branches in other countries that they were not established in order to attractive more workers (Wallison 67). Also, financial institutions picked up from where they had left and resorted some of the position that they had cut in order to have adequate personnel (Wallison 67). The real estate and construction industry were the ones that appeared to recover slowly. Even though, a number of building projects have been initiated all over the United States, they real estate and construction industry have not boomed as they boomed before the financial crisis. Now is when it is thought that the two sectors are bringing in more workers. Conclusion The United States crash of the housing market was an unconstructive event that transpired, which brought about a financial crisis, as well as subsequent recession, that started in 2008. The financial turmoil had long-lasting effects to the United States and European financial systems. United States, in particular, got into a deep recession with almost 9 million jobs lost from 2008 to 2009, nearly 6 percent of the nation’s workforce. This paper finds that the literature with regards to specific aspects of this paper’s topics is limited. For instance, it was difficult to stumble upon sources the industries that were least affected by the recession and how the most recovered industries recovered from their hit. This paper, therefore, advises for further research into these topics. Works Cited Fried, Joseph. Who Really Drove the Economy into the Ditch? New York, NY: Algora Publishing, 2012. Print. Lemke, Thomas P and Lins, Gerald T. Mortgage-Backed Securities. London: Thomson West. 2012. Print. Lewis, Michael. The Big Short: Inside the Doomsday Machine. London: Allen Lane, 2010. Print. Wall, Howard J. “The ‘Man-Cession’ of 2008-2009: It’s Big, but it’s Not Great.” Federal Reserve Bank of St. Louis, The Regional Economist, October 2009, pp. 5-9. Print. Wallison, Peter. Bad History, Worse Policy. Washington, D.C.: AEI Press, 2013. Print. Read More