How does the housing market impact the economy?

Question

Why would the sub-prime housing fiasco affect me in relationship to the economy. I'm not the one losing the money from a bad loan

Answer 1

check this out...

http://www.helium.com/tm/226327

Answer 2

Housing is actually a fairly small percentage of the over all economy. Even though housing is in something of a slump commercial construction is not and has largely offset the housing construction slow down.

New housing construction can affect many areas of the economy as new home buyers buy furniture, appliances, seed, fertilizer, lawn mowers, etc.

In 2003-2004 housing helped jump start the economy, but today's slowdown does not seem to be having a major impact. So it depends somewhat on where you are in an economic cycle.

In summary - it can affect the economy, but usually is not a primary driver. Now a credit implosion is another issue as we saw in the late 80s early 90s with the savings and loan and trift crisis. So watch the problems with sub prime lenders and forclosures for potential problems to the over all economy. If it bleeds over it can cause a loss of confidence by consumers and business and lead to a general economic slowdown (reference late 80s early 90s loan problems to see the possible consequences).

Answer 3

Opinions on this vary, but for those who are concerned about it, the concern isn't related to any fundamental relationship between the mortgage market and the rest of the economy, but a situational one based on the massive amount of money that has flowed into mortgages.

In the last few years, one of the most reliable sources of growth in the economy has been the increasing value of homes. This got stable enough that for many it was more or less given that the best place for your average citizen to put their money was to purchase a home. Since home prices were rising so reliably it was much safer than playing the stock market.

To some degree this was so reliable that the housing market grew when many other sectors of the economy didn't, and it even reached the point that all that money going into houses had a sort of halo effect on the larger economy, benefitting industries like construction or home improvement which had some connection to housing.

There are a number of forces playing into the current trends in home pricing, but subprime mortgages play a critical factor because they allowed people to party on and over-extend themselves beyond what they could afford, and in so doing sinking their money into increasingly shaky and risky loans.

To some degree they were encouraged by a market system of trading mortgages which allowed bankers to cash in from writing loans while having someone else shoulder the risk by trading that mortgage to someone else. Home buyers were tempted into this situation by the prospect of making money on the increase in their home's value and the option of refinancing to dump their old loan and get a new one on better terms.

All of this clearly worked for a while. Unfortunately, the combination of rising interest rates are increasing monthly payments and making it harder to find cheap mortgages just as home prices are falling--in some cases falling so quickly that the home's actual price is falling below the original loan amount.

All of this would merely be one family's financial troubles if it weren't for the fact that so many people were doing this. However, it's gone on long enough that the amount of money at risk may be enough to impact the broader economy. The most obvious loss is the reduced value of the house. In some cases a mortgage will actually go "under water", which is where the home's value is actually less than the amount for which the loan was written. All of those complex adjustable rate mortgages translate into higher monthly payments for a lot of people, meaning that families have to pay more to keep up their house payments. Worse still is that for many of these loans a family is simply paying more to service a loan on an asset which is falling in value, which means the money basically disappears from the economy.

However, a broader concern is the previously mentioned halo effect kicking into reverse. All that money going to house payments isn't going to other parts of the economy. Of course all of this means that all that home selling supporting those mortgage and home improvement companies simply isn't happening any more, which means that their revenue falls and those companies get into trouble. And being durable goods, houses have a way of sticking around. Holders of bad loans will hold out in the hopes of better times, but the net effect is that the holding out only adds to the problem because nobody wants to buy a house when housing prices are falling, and when more houses are being built that nobody is buying, that only makes houses less valuable.

Once again, it's worth repeating that the situation is a complicated one and there's a range of opinion regarding what's going on. There are many good sources for news and analysis on this subject, but I've included the links below for a couple of reports from NPR's business program _Marketplace_.

In the meantime, let's hope that the problem turns out to be milder than people say it is.

Answer 4

It may or not may affect the ecomony. Typically The US economy is so incredibly large and strong that housing fluctutations do very little to impact the stock market or other economic indicators.

If you listen to the media we will all be living in cardboard boxes and begging for soup in the next year, but in reality the housing market always fluctuates and effects most people very little outside of direct home deals they may have.

Answer 5

Housing inventory will increase due to the rise in foreclosures on the market and could lead to drop in sales prices, slow down in building which will affect jobs and economic growth. If this does slow the economy it can lead to the loss of other jobs, slowdown in other businesses which can affect your pay raises, higher interest rates due to the loss of the banks foreclsures which will increase your interest rates on credit cards, auto loans, home equity lines of credit etc.