Housing Market Indicates Trouble

Foreclosure signThe recession may be officially over, but the housing industry seems headed for a further decline. Foreclosures hit a record high in August, new home orders are down 15 percent from a year ago, and home construction is the lowest in a half-century. Moreover, about one in four households with a mortgage owe more than the present value of their house.

Housing is one of the largest sectors of the U.S. economy: Not only are hundreds of thousands of people employed in residential construction jobs, but about 40 percent of consumer spending is housing related. Home equity is the largest component of household net worth. But when home values fall, Americans tend to spend less. Banks often lose money on foreclosures, which also contribute to oversupply of housing that can push house prices even lower.

Even if the housing market has bottomed out, without meaningful price appreciation families still face financial insecurity. Economic analysts are searching for ways out of this housing crisis. One proposal is for mortgage lenders to cut the amount borrowers owe to match the value of their house while homeowners, in exchange, give up half of any gains if the house appreciates in value. Another suggestion is for the federal government, which already guarantees 37 million home loans, to offer millions of homeowners an opportunity to refinance so they will be less likely to default. This measure could have the added effect of putting more money in people’s pockets so that they spend more and thus help stimulate the economy. Other economists argue that it’s time for government stop intervening in the housing market.

Related Links

  • The Housing Recession Isn’t Over
    This article looks at the effects of the glut, or oversupply, of housing, falling prices, and lack of appreciation in home values; includes a video “Eyes on Housing.”
    (Source: CNNMoney.com, September 20, 2010)
  • Remedy for Foreclosures Has Economists Divided
    This article discusses the economic effects of record numbers of housing foreclosures and economists’ competing ideas on how to solve the problem; includes an audio version of the story.
    (Source: NPR, September 27, 2010)
  • US Housing Sector May Be Heading for Double-Dip Recession
    This article discusses such factors as the homebuyers’ tax credit and demographic changes in home formation that help account for the housing market’s woes.
    (Source: ICIS.com, August 31, 2010)
  • Economic Impacts of the Housing Sector
    This Web page explains the significance of housing to the U.S. economy, in terms of jobs, economic output, wealth building, and the importance of homeownership to the “American Dream.”
    (Source: UNT Libraries/Cyber Cemetery, August 31, 2010)

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