Impact of the Housing Market on the US GDP - Case Study Example

Topic: Impact of the Housing Market on the US GDP MICRO AND MACRO ECONOMICS Pick the Instructor name: Introduction: Economics is the social science that deals with money, markets, individuals, investments, economy etc. Economics has two main branches “Micro economics and macro economics” Micro economics deal with individuals and how they earn their livelihood where as macroeconomics deals with aggregate issues or economy as whole. Macro economics consists of concepts that can be applied to the entire world. In economics a financial market is a place which allow buying and selling activities, there are many manufacturers and consumers available in the market. There are many products available of same type hence that raises competition in the market. There are different types of competition and different types of markets available in economic sense. Why is GDP important? The GDP Gross domestic product is one of the primary indicators to predict a country’s stability and economic health. “Gross domestic product (GDP) tells you about the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a countrys standard of living.” Impact of the Housing Market on the US GDP (Facts and Statistics): the housing market of US includes the construction, sale, and resale; of all residential properties all over the country, people might underestimate the US housing market but usually the conditions of the housing market indicates the stability of the entire economy. Homes are fixed Assets. Constructing and selling of the houses are highly related with the economic society. People usually buy houses for the purpose of long term investment. Houses are their tangible assets. People only buy houses when they are confident enough that they will be able to pay entirely for the house. But often people take loans and borrow money from people to purchase a house and when they fail to pay back, this has a very diverse impact on the economy. Besides the basic buying and selling of the houses, whenever a new house is built or purchased many new appliances, furniture, utility services, and many other goods and services are brought. Many people earn their livelihood by constructing, buying and selling of the houses in US. Hence the Housing market has a vast impact on the US economy. “The best way to judge the stability of any country is to look at its GDP, the U.S. economy, as measured by GDP, is everything produced by all the people and all the companies in the U.S. In 2010, it was $14.7 trillion. (The American Bureau facts and statistics 2010)” Housing is a “mid-stream” sector of the economy, meaning that many other industries, both upstream and downstream, is affected by the health of the housing market. For example, the demand for building materials increases in a booming housing market, as does the demand for appliances and furnishings. Even more important in terms of dollars pumped into the economy, is appreciated home values, which have been an important source of stimulus over the past few years. Housing sector contributes to GDP in two main ways: through private residential investment and consumption spending on housing services. In times gone by, residential investment has averaged roughly 5 percent of GDP while housing services have averaged between 12 and 13 percent, for a combined 17 to 18 percent of GDP. These shares tend to vary over the business cycle. The construction of the houses has a small portion of the Gross domestic product i.e. $573 bill-lion. Other investments like furniture and household equipments, comprises another 5 percent of GDP. Altogether, currently the housing sector comprises 15 percent of the economy. (The American Bureau facts and statistics 2011) Constructing a new home building generates income and jobs for the citizens, as well as becomes a source of revenue for the government. Whereas home building also generates liability for the government and increase their costs by increasing police protection, fire protection, supply of education and such other public services from the government. “NAHB has estimated the impact of building 100 single-family housing units, 100 multifamily housing units, and $10 million worth of residential remodeling in a typical U.S. metropolitan area.” (The American Bureau facts and statistics 2011) NAHB estimated a report in which it shows how local jobs, income, and taxes generated effect the government and increases its GDP but NAHB also estimated a report in which it shows how a single family or constructing a new house increases liability on the government as it increases the public services for the government and that has a vast impact on GDP. An all-inclusive measure of home building’s effect on national and state economies is the contribution of residential investment to Gross Domestic Product (GDP) and Gross State Product (GSP). “In 2005 at the peak of the housing boom, home building contributed more than $768 billion to the U.S. economy. In 2007 this contribution shrunk to $641 billion, a 16.6 percent decline, and the slide continued further in the first quarter of 2008. In real terms (i.e., adjusted for inflation) the decline from 2005 to 2007 was an even more spectacular 20.8 percent. When calculated from the peak final quarter of 2005 to the current bottom in the first quarter of 2008 it registers an even more striking 33.9 percent decline. The slump in home building has been and continues to be a major drag on U.S. economic growth.” (The American Bureau facts and statistics) According to NAHB “US house prices fell by between 1% to 11% in 2009, and even more in inflation-adjusted terms, according to the various estimates based on asking prices, selling prices, and mortgage applications” (The American Bureau facts and statistics ) According to NAHB “The number of new single family houses sold in January 2010 was 309,000 units, 6% down on January 2009, and the lowest monthly sales since data was first collected in 1993.” (The American Bureau facts and statistics ) and there is even more bad news : “ Only 4,458,00 new single family houses were sold in 2009, down by 23% from 2008” (The American Bureau facts and statistics ) and to add on “Mortgage delinquencies surged 60% from last year, to 229,139 in Q4 2009, a historic high.” (The American Bureau facts and statistics) The dramatic effect of the housing sector on the US economy is no secret. Prof. Leamer’s 2011 paper suggests that in the year leading up to recessions the housing sector on average accounted for 25% of the weakness in GDP.  This exceeds the 20% average contribution of durable goods, which is usually the sector that receives the most focus and blame by many economists.  Due to all the current statistics and measurements a lot of people faced terrible losses and some even lost their homes, the depression in the housing sector has effected people, physiologically, psychologically, morally and most of all financially. Many people lost their jobs those who work for private residential investment and as well as those who work for consumption spending on housing services both have been effected dramatically. Houses are considered to be your fixed assets but because of slump in the housing sector many houses lost their original value and the re-sale value of many houses are horrifying. People even faced great loss in the stocks and market share because of all this recession going on in the housing sector. People who majorly got affected include the real estate agents, the brokers, the construction companies, land lords, labor and most of all the general public. “People don’t expect their home to regain value, and that’s really led to a change in consumer attitudes about the economy that we’ve just never seen before,” said Richard Curtin, a professor of economics at the University of Michigan who directs its Survey of Consumers 2011. A recent paper by Karl E. Case, an economics professor at Wellesley College, and two co-authors estimated the decline in home prices from 2005 to 2009 caused consumer spending to be $240 billion lower in 2010 than it otherwise would have been. That figure is equal to about 1.7 percent of annual economic activity, enough to be the difference between the mediocre recent growth and healthy growth. Current situation: It has been almost 5 years that US housing sector is facing major recession. According to local economist article published on November 5, 2011 there are 4 reasons why home prices are likely to keep falling. 1. Theres still a glut of houses on the market. At the current pace, it would take about seven months to sell all of the newly built houses on the market, and eight months to sell all of the existing homes on the market. In an ordinary market, it would take about six months to sell all of the homes on the market. This excess supply tends to push prices down. 2. Distressed sales distressed sales include foreclosures and short sales, where the owner sells for less than he owes on the mortgage. According to one measure, distressed sales accounted for nearly half of all home sales in January. These homes typically sell at a discount. 3. Interest rates are rising. The rate on the average, 30-year mortgage hit 5 percent this month, (November 5, 2011) up from a low of 4.17 percent last fall. Higher interest rates make it more expensive to buy houses. 4. The government The Obama administration has already recommended lowering the cap on the size of mortgages that are guaranteed by taxpayers through Fannie Mae and Freddie Mac. The cap was raised to as much as $729,750 during the crisis, and is scheduled to fall to $625,500 later this year. The latest downward leg in home prices started after the end of the government program. First-time home-buyer tax credit, where the government paid people thousands of dollars to buy houses. What Government can do to help the Housing Market? economist believe that government is not doing enough to help the recession in the housing market and economist believe that government need to take certain steps to help the Recession and the negative Impact of the Housing Market on the US GDP. The government should introduce more Mortgage Help programs for the local citizens Government should introduce a counseling program for the real estate agents, the brokers, the construction companies, land lords, labor and most of all the general public so that they don’t lose their hope in the local housing sector and keep investing and working. Because of the current situation people have lost their hopes and their confidence have been shattered. Government should lower the taxes and charges on constructing the houses and selling them. The higher taxes from the government have a diverse effect on the housing sector. That includes : INADEQUATE INCOMES, LOW WAGES, HIGH PRICES, PRODUCT UNAVAILABILITY AND DISCONTINUATION, LOST JOBS, FORECLOSURES, EVICTIONS, AND HOMELESSNESS, high mortgage rates, POVERTY AND HIGH CRIME, CHRONIC RECESSION and LOW REAL TAX REVENUES. Government should provide loans to help the real estate agents, the brokers, the construction companies, land lords, labor and most of all the general public to get out of this recession and slump of the housing sector Government should cut down the mortgage and interest rates to help the housing sector. Conclusion: the Impact of the Housing Market on the US GDP is negative. Hence the government, the real estate agents, the brokers, the construction companies, land lords, labor and most of all the general public all should join hands and do something positive to make the housing market boom again and kill its diverse effect on the economy . The housing market softness clearly has had an impact on investment spending for residential housing as well as for employment in residential construction and other sectors that tend to be dependent on the construction sector. Meanwhile, economists continue to watch for a potential negative wealth effect driven by a slowing housing market and for evidence that the weakness in the housing market is spreading beyond construction-dependent sectors to the overall economy. References 1. Kahn, James A. "Productivity Swings and Housing Prices". Current Issues in Economics and Finance, Federal Reserve Bank of New York. Volume 15, Number 5, July 2009. 2. Krainer J. "Housing Markets and Demographics". FRBSF Economic Letter, Number 2005-21, August 26, 2005. 3. Tanzi, Alex. "US Home Foreclosures Rose 15.1 Percent in January," Bloomberg LP. February 11, 2010. 4. Kelley, Rob (14 June 2007). Mortgage rates: biggest spike in 4 years. CNN. Retrieved 26 May 2010. 5. Kelley, Rob (14 June 2007). Mortgage rates: biggest spike in 4 years. CNN. Retrieved 26 May 2010. 6. Forrest, R. (January 01, 2008). Globalization and the Housing Asset Rich. Global Social Policy, 8, 2, 167-187. 7. Cho, S.-H., Kim, S. G., & Roberts, R. (January 01, 2011). Values of environmental landscape amenities during the 2000-2006 real estate boom and subsequent 2008 recession. Journal of Environmental Planning and Management, 54, 1, 71-91. 8. The American Bureau facts and statistics Read More