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Macroeconomics: Collapse of the United States Housing Market Essay

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Updated: Dec 4th, 2019

Introduction

Economic recession is a cycle in business in which there is relatively lower economic activities in the business market. Such was the experience that the economy of the United States faced in the year 2009 following the crisis that was realized in the housing market.

Though a recovery has since been realized, macroeconomic factors have been players in the housing bubble and the realized recovery. This paper seeks to discuss the macroeconomics of the United State’s economy.

The paper will look into circumstances that led to the collapse of the United States housing market, classifications of macroeconomic indicators and possible steps towards economic recovery of the United States.

Factors that led to the Collapse of Housing Market

The collapse of the housing market was considerably a culmination of factors that had accumulated in a system for a long period of time. One of the causes of the crisis was identified to be the policies that were over time adopted by the country’s policy makers.

Government policies made over the last three decades in the mortgage sector had, for instance, been geared towards pushing financial institutions towards increasing the level of financing to the general public. These policies thus pushed the institutions to offering loans to individuals who even failed to meet required credit worthiness levels.

Legislations such as the “community reinvestment act” of the year 1977, for example, called for financial institutions to make lending advances to the communities in which they operated.

The consequence of the legislation was that if an individual applied for a loan then the institution could have no option but to comply with the application or risk being accused of violating the country’s constitution.

This move thus forced banks and other financial institutions to offer risky lending. The result was an increased borrowing that was invested in the housing sector. This eventually had a destabilizing effect on the market owing to the market forces of demand and supply (Gordon, 2008).

The Federal Reserve was equally accused of fuelling the eventuality of the collapse in the market through steps towards destabilization of the housing market. Though the move might not have been direct or intentional, it played a role to the change in demand in the housing market.

In a move that was viewed as a step towards stabilization of the economy, the public was to be empowered into investments through lowered rates.

The reduced rates also contributed to people’s motivation into taking loans which were directed towards the housing market. This is particularly because the loans were made affordable to an increased majority that had previously feared the previously high rates (Murphy, 2008).

The capitalistic system of the American economy is also a factor towards the crisis that was realized in the housing market. The fact that money value as well as the flow of capital is determined by the Federal Reserve rather that the market demand and supply for money also pushed the responsibility to the hands of the federal government and the Federal Reserve for the crash in the market.

Since the Federal Reserve determines the flow of capital in the economy and even the money value, inaccurate decisions over these issues will bear consequences to the economy in terms of monetary value which translates to economic instability.

The policies and legislations that led to increased lending were not out of credit worthiness considerations but due to pressure on the demand in the housing sector. Consequently there was inflation in the value of the houses.

The price of the subprime loans that were pumped into the market also led to increased rates on repayments that put burden on individual investors. People could then not pay for the loans leading to repossessions and a final collapse in the real estate value and the ultimate collapse of the housing market.

The collapse of the market was thus due to economic policies that destabilized the market forces in the sector leading to its fall (BBC, 2007).

Macroeconomic indicators

Macroeconomics deals with the totality of an economy in terms of its performance and even behavior and structures among other aspects. Macroeconomic indicators can be classified into three categories.

The first classification is the leading macroeconomic indicators which are defined as preliminary variables that foresee an occurrence in an economy. They point out to an occurrence that is not yet realized but is imminent. They are identified as the “variables that predicts or lead to” (McEachem, 2005, p. 432) economic changes.

Though the leading indicators are a hint of what could happen in the economy, they cannot offer exact illustration of what will occur but rather offer a probabilistic forecast that could at the same time be wrong.

A reduced rate of turnover in an industry can, for example, be an indicator of initial stages of recession in an economy. A change into improvement in the rate and volume of sales would on the contrary indicate a turn into economic recovery (McEachem, 2005).

Another class of indicators is the coincident macroeconomic indicators. Coincident indicators are those variables that identify the extremes of an economy. They identify the economy’s best and worst performance in terms of period and even properties.

Considerations of factors such a “total employment and personal income” (McEachem, 2005, p. 432) are examples of coincident indicators. Lagging indicators are on the other hand variables that show effects of economic changes and are identified after these changes have occurred.

Such indicators include factors such as interest rates and considerations of unemployment in an economy in terms of time period (Elwell, 2011).

Possible Steps towards Economic Recovery

The economic recession as realized by the United States in the year 2007 to the year 2009 are significantly blamed on economic policies that drove the housing market to its inflation and subsequent collapse.

Necessary counter measures to this inflation, which I would adopt if I were the president, are monetary together with fiscal policies.

Monetary policies such as increasing the lending rates as well as restricting regulations on bank lending are some of the measures that I would enact to reduce the money flow into the economy.

Among the fiscal policies that I would adopt is the federal investment into the housing sector in order to save the American citizens from losing their houses to financial institutions in the form of repossessions.

Conclusion

The performance and state of economies are cyclic with recession and recovery sessions. Though it can at times be abrupt and inevitable, there exist indicators that can predict economic cycles. Necessary policies can also be adopted to prevent or control unfavorable economic periods.

References

BBC. (2007). The downturn in facts and figures. Retrieved from:

Elwell, C. (2011). Economic Recovery: Sustaining U. S. Economic Growth in a Post-Crisis Economy. Darby, Pennsylvania: DIANE Publishing.

Gordon, R. (2008). Did liberals cause the subprime crisis? Retrieved from:

McEachem, W. (2005). Economics With Infotrac: A Contemporary Introduction. New York, NY: Cengage Learning.

Murphy, R. (2008). Did the Fed cause the housing bubble? Retrieved from:

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IvyPanda. 2019. "Macroeconomics: Collapse of the United States Housing Market." December 4, 2019. https://ivypanda.com/essays/macroeconomics-6/.

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IvyPanda. (2019) 'Macroeconomics: Collapse of the United States Housing Market'. 4 December.

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