Sample Economics Essay Paper on United States housing market

United States housing market

Background information

Historically, the United States market has been unpredictable, volatile and cynical as the market has experienced downfalls that have gone ahead to affect entire economy (Holcombe and Benjamin 77). This can be traced from the savings and loan crisis to the crisis experienced in the late 2000s with devastating effects to economy. The financial crisis that was experienced between 2006 and 2007 was attributed to the collapse of the housing sector in United States and was majorly blamed on the collapse of the housing bubble (Holcombe and Benjamin 84).

The crisis originated after the downfall of real estate and was described by economists as the housing boom where individual home owners were lured into investing into the sector with the promise that housing prices would tremendously continue to rise. This led to the opening of more opportunities for members of the public to invest heavily in the sector in form of housing facilities and real estates (Bardhan et al 16). In light of this, most banks continued to issue loans to people without proper verifications and guidance, this in the process reduced individual savings as many people were involved in investments in the housing market. It is asserted that the investment changed the behavior of people to use their savings as equities and securities to get loans so as to invest into housing sector (Bardhan et al 20).

Economists have pointed out that sustained individual expenditure in the housing sector was firmly knit to the housing prices, this prompted the entire world economy to heavily invest in the housing boom and therefore when the bubble collapse in 2006 the global economy was affected creating an economic crisis that required sound fiscal and monetary policies to salvage. The collapse of the housing market sector in United States was felt to other countries and economies, stock markets declined by around 48 percent with Chinese economy experiencing a drop of exports by an estimated 3 percent. Financial specialists opine that numerous financial establishments in different countries continued to experience problems with the quality of assets and their balance sheets were constrained on supporting their economies (Bardhan et al 25).

Causes of the housing market crisis

The housing market crisis experienced between 2000 and 2007 was blamed on banks that created too much money and in the process used the created money to push up house prices without speculating the impacts on financial markets (Schwartz 80). Money was created through loans issued to borrowers to invest in the housing boom with the expectations that housing prices would continue to increase. It has been established that little amount of money went to other sectors with statistics pointing out that a round 31% went to residential property, which pushed up house prices faster than wages, a further 20% went into commercial real estate, approximately 32% went to the financial sector, and the same financial markets that eventually imploded during the financial crisis (Schwartz 82). Moreover, financial experts have established that just 8% of all the money that banks created in this time went to businesses outside the financial sector with a further 8% going into credit cards and personal loans (Schwartz 83).

Later, it was evident that the loans that were issued could not be paid with financial professionals arguing that lending large sums of money into the property market pushed up price of houses along with personal debt level. Moreover, they also asserted that the interest for the loans accrued could not be paid, the debts continued to rise more than incomes, people were unable to pay such loans and the banks could no longer provide other loans to reinforce the housing sector (Schwartz 80). The housing market continued to collapse since after the crisis, banks shrunk their lending and the slowdown in lending caused prices in these markets to drop, and this means that those who had borrowed too much had to sell their assets in order to repay their loans.

There are also other factors that may have been responsible for the decline in the housing markets in the United States and include low documented loans; it is believed that after the recession self-employment rose and so borrowers qualified for low loans. Later, the market tightened, the low borrowers were subjected to more stringent loan applications review that made it tougher for them to qualify for such loans (Schwartz 94). In light of this, some homeowners were unable to refinance the sector due to inability to qualify for loans and as homes lost value, they lost equity (Schwartz 95). This was also necessitated by the low adjustable-rate mortgages as many home buyers see the benefit of them in terms of initial lower interest rates and low monthly payments for their loans.

It has been attested that in the early 2000s medium home values rose rapidly and in the process prompted home owners to use their homes as securities to withdraw their equities to improve on the housing facilities and in the process incurred debts that could be used in developing the housing sector markets (Schwartz 98). Further, as house values started to decline many home buyers were unable to pay the second loans advanced to them and thus prompted them to put their houses in the market, the homes were appraising at less than what was owed on them.

The falling in house markets in United States is also attributed to the decline in credit score of homeowners and thus finding a lender willing to lend money to someone with a low score was difficult and is still an uphill task. Economists have affirmed that for prospective buyers with poor credit or little savings, this seems to put homeownership almost out of reach (Schwartz 105).   

Measures to protect the housing market

Collapse of housing market in the United States has largely been blamed on loans issued by banks to borrowers; the first measure is for the Federal Reserve to use interest rates to stabilize money supply in the economy. Financial analysts have opined that if the supply of money in economy is stable, price levels of assets will also be stable and thus prevent existence of booms and bubbles in the economy (Weicher 35). It is clear that two firms have been controlling securitized mortgages in American economy, Fannie Mae and Freddie Mac, should be privatized as in their current form they are in position to receive financing at the same rate as the federal governments. When this is done, they will be subjected to the same market conditions and thus will not have advantage of over-controlling the economy. In light of this, large amounts of liquidity will be eliminated and in the process protect market from distortion, it should be done in sequence especially when housing market has comfortably recovered from upsets.

Housing markets have been on the decline due to other market players like failing companies; it is worth pointing out that state should not bail out companies that are failing. It is asserted that financial crisis of 2007-2008 saw some companies bailed out as they were considered too big to fail, assistance of government to failing companies has been described as being unethical since such firms will not fully define their survival mechanisms in a struggling economy (Weicher 42). To effectively prevent housing market and the entire economy from collapse, financial system must come up with incentives that would stimulate long-term investments. It can be remembered that the housing sector collapse because every investor was involved in the short term housing boom.

There is need to pave way for a robust private mortgage market since an essential housing finance comprising of house buying, money lending and investment of capital is purely a private affair. The government should therefore play an important role in providing oversight and standards for consumers and investor protection to prevent another housing crisis. Economists in United States have pointed out that the government should restrict area of mortgage financing by Fannie Mae and Freddie Mac so that government support is substantially reduced (Weicher 41). This measure is aimed at ensuring that housing market institutions have the financial capability to meet the obligations that are vital in ensuring a robust housing sector, the government should just come in to reform the sector and not to undermine the process of economic recovery.

It has been established that most people have lost trust and faith in the housing sector and have seen little investment due to the collapse of the housing boom and so there is need for a rejuvenated mindset through restoration of trust and integrity in the wider housing market (Schwartz 117). Experts have assured that this should come in form of vigorous reforms that can help in addressing the existing flaws in the sector so as to restore the trust and integrity in the mortgage market (Schwartz 118). Financial market analysts have confirmed that such reforms would improve consumer protection, support the creation of safe, high-quality mortgage products with strong underwriting standards, restore the integrity of the securitization market, restructure the servicing industry, and establish clear and consolidated regulatory oversight (Schwartz 124). It is worth remembering that the housing market faced problems because borrowers and lenders did not make informed decisions before investing in the housing boom, these reforms are thereby needed to provide a platform in which borrowers, lenders, investors and other economy players will make sound decisions through empowering local consumers on how to avoid unfair market practices that may hurt the housing sector and economy. It is believed that transforming the sector would entail curbing abusing practices, promoting choice and clarity of investments, improving underwriting standards, requiring originators and those who provide securities to retain risk, improving on information access by all the housing market stakeholders and strengthening the market regulatory authority (Schwartz 128). 

Lastly, to prevent future mishaps in the housing market, the government should initiate a transparent housing system options that is accessible and affordable. It is opined that there is need to ensure that individuals with good credit history, have financial capacity are willing to invest in the housing sector have the opportunity to do so, and this should also be necessitated by the existence of affordable housing options (Schwartz 130). It is important to note that as the government is initiating housing options that are affordable to the people they should learn from failed efforts in the past and so policies should have appropriate target and be more transparent while focusing on providing necessary support to stakeholders. This will be instrumental in ensuring access and preventing past mistakes that led to the collapse of housing boom, it is asserted that measures to ensure achievement of this initiative, will be to reform and strengthen mortgage institutions, commitment to affordable rental housing, ensuring capital availability for those who are worthy and providing a flexible and transparent funding source to support targeted access and affordability initiatives (Schwartz 135). 

Conclusion

Arguments have affirmed that collapse of housing markets in United States was attributed to bursting of the housing bubbles leading to reduction in house price and thus affecting the entire economy (Weicher 20). There is need for government to come up with measures that would be instrumental in preventing future collapse through initiatives of re-evaluating loans and interests, privatizing mortgage institutions and making sound investment decisions in the housing sector. Government efforts will be useful in protecting the delicate housing market through bringing sanity in loans and interests given by lenders and thus will prevent future occurrence of housing crisis that most people have imminently predicted.

Works cited

Bardhan, Ashok D, Robert H. Edelstein, and Cynthia A. Kroll. Global Housing Markets: Crises,

 Policies, and Institutions. Hoboken, NJ: Wiley, 2012. Print.

Holcombe, Randall G, and Benjamin Powell. Housing America: Building Out of a Crisis. New

 Brunswick [N.J.: Transaction Publishers, 2009. Print.

Schwartz, Alex F. Housing Policy in the United States. New York: Routledge, 2010. Print.

Weicher, John C. Housing Policy at a Crossroads: The Why, How, and Who of Assistance

 Programs. Washington, D.C: AEI Press, 2012. Internet resource.