There has been a slowdown in the real estate market in the US in 2009 due to the effects of the financial crisis which started in 2007. According to Adam, the US real estate market in 2009 has had adverse effects on the country’s economy and is becoming worse off (Para.1). Real estate contributes approximately 10% of US Gross Domestic Product (GDP). Therefore a slump in the US real estate market will have serious effects on the country’s economic growth. To prevent the effects of the real estate market on the economy, the US government should undertake monetary policy to bail out the sector. The discussion of this paper entails an analysis of the effects of the real estate market on the US economy. It also analyzes the reasons why the government should bail out the sector and the impact on the economy.
Effects on the economy
Reduction in investment and increase in the unemployment rate
The slump in prices within the US real estate market resulted in a decline in the level of domestic and foreign investment into the sector. This is because the investors have lost confidence in the sector and perceive a low return upon investing in this sector. This is because the value of individual homes has been greatly reduced.
A decline in the rate of investment in the real estate sector in the US increased the rate of unemployment. This is because many other sectors are associated with the real estate sector. For example, reduction in real sector investment culminated into job loss in other businesses such as building materials, construction, and financial institutions such as mortgage firms, sales agents, and brokers in real estate. For instance, within the construction industry, the level of unemployment currently stands at 15.3% which is relatively higher than the industry average of 7.2% (Kirchhoff Para. 5).In addition, the reduction in investment in this sector also resulted in unemployment in firms manufacturing trucks.
Reduction in consumer purchasing power
Personal consumption in the US forms approximately 70% of the country’s GDP (Amadeo Para. 4). Due to an increase in the rate of unemployment, there was a reduction in the consumers’ disposable income. This culminated in a reduction in their purchasing power. Reduction in disposable income has resulted in a decline in the living standards of the citizens. This is because consumers shifted their consumption to other items especially the necessities. In addition, a reduction in personal consumption has also resulted in a reduction in the disposable income of the citizens.
Risk of another recession
The slowdown in the performance of the real estate market has also affected financial institutions. This is because most of the investors in real estate use mortgage finance as a source of investment capital. Increased unemployment has resulted in the inability of the consumers to service their mortgages. This puts the US economy at risk of another recession due to an increase in the default rate in loan repayment which will affect the operation of financial institutions. In 2009, it is predicted that the loan loss will increase to 5.5% which is relatively higher than that of the Great Depression which was 3.4%. For instance, approximately $400 billion in mortgages will be due by December 2009(Kirchhoff Para. 8). This means that most of the investors will have difficulties financing their loans.
Reason for giving out money to real estate market
Restore the level of confidence
The US government should give money to the US real estate market to prevent the occurrence of another recession (Amadeo Para. 3). Giving money to the real estate market is a monetary policy that will result in a reduction in the cost of capital for real estate. A reduction in the rate of interest will increase the number of investors venturing into this sector. This means that there will be an increase in the level of confidence amongst the potential investors in real estate. An increase in the rate of employment will increase the level of employment which will culminate into an improvement in personal consumption and hence their living standards. This means that the country’s economic growth rate will be enhanced. In addition, giving money to the real estate market will result in a reduction in loan default rates.
The slump in the performance of the real estate market in the US has affected the country’s economy in 2009 in several ways. The country’s rate of unemployment has greatly increased due to a decline in the rate of investment in the sector. This is because other sectors have been affected by the decline in the rate of investment. The increase in unemployment has resulted in a reduction in the citizens’ purchasing power and hence their living standards. There is also a risk of another recession occurring due to an increase in loan default rate if the government does not intervene (Nouriel Para. 6). By undertaking a monetary policy about the real estate market, there will be an increase in the level of investment in the sector due to a reduction in the rate of interest. The result will be an increase in the level of employment.
Amadeo, Kimberly. “How does the US real economy affect the US economy?” 2009. Web.
Kirchhoff, Sue. “Economic downturn pounds commercial real estate market.” USA Today. 2009. Web.
Roubini, Nouriel. “The biggest slump in US housing for the last 40 years.” 2006. Web.
Whitney, Mike. “US housing market crash to result into the second great depression.” The market oracle. 2007.