The Economical Effects on the U.S. Housing Industry

Written by: Kelly L. Hunter

By now it is common knowledge that the United States’ economy is at an all time low causing many homeowner’s as well as contractors and laborers within the housing industry to panic. Many industries have been greatly affected by this crisis and the U.S. housing industry has been one of the hardest hit throughout these unfortunate times. From unemployment to foreclosures, the housing industry has been on a downward spiral for many years now, causing concern and raising many important questions. Throughout this paper I will discuss several areas that have been affected within the housing industry that have many people concerned about what other obstacles may lie ahead for this particular industry. Supply and demand, positive and negative externalities, wage inequality, and monetary fiscal policies are the main focus of this paper.
Our increasing National and Foreign Trade deficits are having a major impact on every industry; especially the already struggling housing market. Increases in “short-term” interest rates have been substantial enough to cause alarm and have many wondering exactly how “short-term” these increases really are. “For example, a sudden increase in the interest rate, such as 2% (200 percentage basis points), would substantially impact most areas of our economy; it will impact the ability to make other positive changes in U.S. tax law, trade deficits, budget deficits, the housing market, and much more”(Levine. 2005). According to some experts, the actions of other foreign leaders may also have had a serious impact on the U.S. economy.
“Major foreign investors may determine that the sliding value of the U.S. dollar lessens real property values in the United States; terrorism remains an important concern in all areas, including its impact on economics; rising oil prices have damaged the hope for a trade balance; and other issues could potentially cause major upward changes in the interest rate”(Levine. 2005). The housing market has been affected very negatively due to many if not all of these factors. Employment rates have been affected mainly because the American people have lost their faith in the U.S. economy and fewer are buying real estate causing a decrease in employment within the housing industry itself. The price of real estate has gone down substantially over the past few years and homes that once sold for hundreds of thousands are now selling for as little as $28,000.00 or less in some regions of the country. These are prices that have not been seen for decades.
Production in this industry has decreased in such away that many houses and building structures sit unfinished and abandoned. The Federal government must increase interest rates in order to maintain and control the rate of inflation. “Wages and prices begin to increase if monetary policy stimulates the economy beyond the market capacity or when the money supply exceeds the real growth rate”(Kalainesan & Hoteit. 2006). Monetary policies have a tendency to cause a short-term increase in employment. However, on a long-term scale, unemployment begins to outweigh this increase. On the other hand, a decline in the housing market does not always mean a decline in the commercial sector of construction.
Employment may be decreasing on the private level in the housing industry. However, employment has remained relatively steady on the commercial level. Fiscal polices have had an effect on the housing market that has caused an increase in demand in commercial real estate. Many of us can drive down our local streets and highways and see that the commercial portion of the housing industry doesn’t seem to have been affected at all. Although buildings seem to be going up left and right, these spaces are not leasing out as quickly as many in the industry had hoped. This is a true sign of our current economic crisis, a crisis that does not seem to be going away anytime soon.
Other factors associated with the current struggle in the housing market include oil prices. “If the oil prices increase, the Feds will have to increase the interest rates to fight inflation which may cause further decline in the housing segment and the GDP” (Kalainesan & Hoteit. 2006). When American’s can no longer afford to put gas in their cars, it is obvious that they cannot afford to put their money into the housing industry either. Although most of us have seen a decrease in gasoline prices over the past couple of months, American’s are still worried that prices will sky rocket once again. Therefore, everyone from every classification of life seems to have a firm grip on their wallets. The housing market alone was a substantial carrier of the U.S. economy for many years and when an industry like this one can no longer hold itself up, further economic problems begin to arise and the tremendous set backs are felt throughout the entire nation and often times, the world.
It seems that negative externalities are the only thing surrounding the housing industry as of late. The days of low interest rates and the option for refinancing are becoming a distant memory. “Housing finance stands at the crossroads of savings and investment and, therefore, is at the very heart of economic development” (Waigel. 2000). With rapidly increasing interest rates, many individuals and families can no longer afford to purchase a home for their family to prosper and grow in. The old “Bubble” word is beginning to come up once again as well. A housing bubble occurs when housing prices begin to rise due to overgrowth in the market. According to reports, the riskiest housing markets included ten metropolitan areas in California. Boston, New York, New Jersey, Rhode Island, and Michigan are also areas where homes are extremely overpriced (Levine. 2005). Supply is no longer balanced with the demand for affordable housing.
Natural disasters although devastating to homeowners and renters alike, may have helped the housing industry to some degree. With millions left homeless after hurricanes Katrina and Rita, the Gulf Coast portion of the United States is where private home construction is seeing most of its contracts. However, if individuals and families cannot afford to rebuild their homes then where will the funding come from? Many non-profit organizations have stepped into help with the recovery efforts; however, fraud has played a major role in the decrease of Federal funding. “While about 95 percent of all IHP recipients of disaster relief assistance following hurricanes Katrina and Rita paid their federal taxes, tens of thousands owed federal taxes at the time of the disaster” (Tax Compliance. 2008). This factor alone has caused severe damage to our economy.
Wage inequality has also been an issue in every industry for quite some time and the housing industry has been no exception. “The middle class certainly has been affected, as the stagnation in wages put pressure on home ownership rates, but the big impact has been on the rental market, as both relative and real incomes fell for those at the bottom of the income distribution, the people who traditionally have been renters” (Schnare. 1996). If people are not making wages that can support their families, then they surely cannot afford to keep up on a mortgage payment or rent for that matter. There is a rapidly growing gap that separates the cost to operate an apartment or home and the ability for one to afford to rent property. “This has led to two problems, the physical decay we see in urban areas and an increased demand for government subsidies” (Schnare. 1996). If Federal funding is not available to organizations like HUD, then assistance cannot be distributed properly amongst lower income families. Reports indicate that the major problems with housing in urban areas can be related back to wage inequality.
Price elasticity is a measurement of how buyers respond to shifts in conditions of any given market. The housing market’s shift in price concerning real estate has caused a great deal of damage to not only the market but to the livelihood of society. Experts say that this is a buyer’s market, but is it really a good time to purchase a home? Mortgage companies and banks are going out of business by the dozens and what firms remain, are skeptical about lending out money. Our current deficits are said to be record breaking and if the government is in debt, the American population is in debt as well. The United States, once the richest countries in the world is now probably amongst the poorest; the War alone is digging us deeper into a hole.
In conclusion, the United States is in dire straits and economically speaking, we are falling apart at the seams. American people are losing their jobs, families are losing their homes, the percentage of homeless persons is increasing to astronomical proportions, foreign investors no longer want to put their money into our economy, and unemployment rates are out of control. Every market and industry across the board is suffering individually and as a whole. The American people no longer trust their government’s decision making process and job security has long been a thing of the past. There are no simple solutions to our current economic crisis that is for certain. In fact, the only thing that does seem to be for certain is that the American people are fed up with this unnecessary struggle. There are definitely no simple solutions to how we can pick up the pieces of what was once a prospering industry. The housing industry like many others, has hit rock bottom.
Our only hope seems to be that our new Presidential administration will help the American people rebuild our economy as well as our relationships with foreign countries and investors. The need to repair these relationships is apparent in order to strengthen not only our country’s economy but the global economy as well. Without foreign trade, our country will surely become one known for its long bread lines and severe poverty stricken people. In this day and age it is hard to wrap your mind around the fact that there are still so many underdeveloped countries. It would be a terrible shame to see a country once so powerful become amongst the weakest. Change is definitely our only hope and the only cure for this crisis. The question is, how long will it take for this change to come?



Reference(s)

Kalainesan, L., and Hoteit, T. “U.S. Economy 2006-2007 Forecast and Housing Market”. University of Dallas. (2006). Retrieved February 5, 2009.

Levine, M.L. “Budget Deficit, Trade Deficit, Savings Deficit and Monetary Policy Deficit: “Are We Ok?”. Real Estate Issues. (2005). Retrieved February 5, 2009. www.allbusiness.com

Lipsky, J. “The Global Economy and Financial Crisis”. International Monetary Fund. (2008). Retrieved December 11, 2008.

Povich, E. “Housing Industry Asks For Help With Hurricane Recovery”. Congress Daily. (2005). Retrieved December 17, 2008.

Schnare, A.B. “Income trends and the housing market-Special Issue: Earnings Inequality-Panel Discussion”. New England Economic Review. (1996). Retrieved December 30, 2008.
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“Tax Compliance: Some Hurricanes Katrina and Rita Disaster Assistance Recipients Have Unpaid…”. General Accounting Office Reports and Testimony. (2008). Retrieved February 12, 2009). www.allbusiness.com/government

Waigel, T. “Economic challenges to housing finance”. Housing Financial International. (2000). Retrieved February 12, 2009. http://www.allbusiness.com