The Housing Bubble’s Link to the Great Recession.
A recession is caused by many different factors, not just one. It is the coming together of many different problems, all at one time. Some factors that contributed to this last Great Recession include consumer indebtedness, income inequality, lax regulations and the housing bubble. In this paper we will discuss how the Housing Bubble exacerbated and what is its link to the Great Recession. It is necessary to note that because the bursting continues and because lessons have not been learned from previous recessions, nor this one, the problem may remain for a while, fueling this recession further. “There is no doubt that Housing troubles have contributed to the recession and continue to keep recovery down. The housing sector in the U.S. played a major role in the recent financial crisis, and in making the recovery from the resulting recession so anemic. In the U.S. we had seen regional declines in home prices during previous recessions, but had not seen a national decline in house prices in the post-war era.” (Rosengren, 2011).
The Housing Bubble’s link to the Great Recession is great, but it is only one factor. If you imagine the recession as a wheel, the Housing Bubble is one spoke, in the wheel. Each spoke of the wheel helps propel it forward, giving the recession momentum. Once the recession starts moving forward it is very hard to stop it or reverse it.
Housing’s Role in the economy
“And as housing goes, so does the rest of the U.S. economy. As the value of housing increases, the wealth effect kicks in. It’s estimated that consumers eventually spend as much as 5% of the increase in the value of their homes.”(Jenkins, 2012)
Most importantly, housing is a crucial part of the economy. As such, if there is trouble in the housing sector, there will be consequences on the entire economy. “Let’s start with the basics; such as housing is the largest asset on people’s balance sheets. It provides a means of liquidity, a way to access cash and spend it on goods or services, in turn fueling the economy.”(McNamara, 2011)
Housing is a major contributor to the economy in many ways. Most importantly it encompasses and contributes to many different jobs, from white collar to blue collar. “Housing is relatively labor intensive. Nearly 12.5% of jobs were estimated to be related to housing during our last boom – which also includes employment tied to housing finance, such as mortgages. And take this into consideration; construction workers earn 25% to 30% more than the average pay in the economy.”(Jenkins, 2012)
Housing provides jobs in many sectors of the economy. There are the direct jobs: such as architects, designers, builders, contractors, subcontractors, daily workers. There are real estate agents, realtors, bankers and mortgage lenders and lawyers. But there are also suppliers of materials both to the home builders and to the home buyers: the lumber companies, the hardware and the home supply stores, the furniture manufacturers and stores, the curtain stores, the home goods stores, like Marshals, Walmart, Target, Ikea. Then there are the landscapers, the nurseries, the garden furniture and the garden tool manufacturers. It is a large percentage of the GDP. “Since the end of World War II, residential fixed investment (new home construction and remodelling spending) has accounted for nearly 5% of the United States’ GDP. But total housing expenditures – which include residential fixed investment, as well as rents, furnishings and other housing-related expenditures – have accounted for about one-fifth of total GDP.” (Jenkins, 2012)
Thousands of manufactured goods supply one single home from the cement for the foundation, to the shingles on a roof and every product from wiring to pipes, and every decorative item in the house from large furniture to picture frames inside. One can say that the housing industry is connected to and touches in some way all branches of...
Please join StudyMode to read the full document