Macroeconomics Industry Paper
A lot of market analysts and economists say that the US economy is already approaching its recession stage. Moreover, they are attributing this instability of the US economy to the disruption on the consumption spending of the consumers caused by the sudden down turn on their disposable income during the last quarter of 2005. In this regard, GDP of the entire US economy depleted alongside with the negative effect of the degradation of consumer’s disposable income to various industries especially the housing industry. Due to the unexpected decline of the disposable income of consumers, the housing industry has been left with a little room for adjustment which makes its situation worst.
History of Housing Industry
Since 1940’s the housing industry has been experiencing impressive growth until the twentieth century. From around 44 percent homeownership rate to nearly 67 percent homeownership rate in 1999 served as the basis for new players to enter the housing industry, see Appendix 1. After the World War II in the 1940s a lot of American soldiers started to go back and settled to United States. Moreover, the support coming from the government on the American soldiers from the Second World War boosted disposable income of the consumers in the market especially the housing industry. The Servicemen’s Readjustment Act of 1944 provided the veterans guaranteed mortgages under the Veterans Administration which leads to the booming of the housing industry (Cox & Utt, 2001).
As the number of consumers purchased housing units, the industry itself became more profitable which augment to the GDP of the entire economy. Housing Industry belongs to the investment component of GDP alongside with domestic consumption and government spending plus the net exports. In this regard, the improvement of consumer’s disposable income greatly helped not only the housing industry but also other industries on the economy. Aside from the subsidies that the government provided to the veterans of World War II, they also started to include into their goals the encouragement of homeownership since most of the Americans were just either tenants, renting a room or apartment.
With the enactment of National Housing Act, the Federal Housing Administration was established which provided aids to housing companies through reducing the risk of investment mortgages and by pushing the implementation of a new classification of mortgage instrument namely: fixed rate, long term, level-payment and fully amortized mortgage. This new mortgage instruments by FHA provided further growth to the housing industry.
From the identified innovations and postwar prosperity that the Americans experienced, homeownership rate reached 55 percent during the 1950s and 60 percent in the 1960s. By the year 2000, homeownership attained around 68 percent during the third quarter of the said year. Furthermore, the said commitment of the federal government on helping the housing industry to recover caused for the improvement of quality and quantity of housing units being produced for the economy. In this regard, the following years for the housing industry continuous to improved until such time wherein the federal government no longer worried about the condition of the said industry.
Overview of the Housing Industry
Indeed the housing industry experienced impressive growth in the market but only until the first quarter of 2006 wherein the disposable income of the consumers started to decline causing the down turn on the demand of consumers not only to housing industry but also to other industries in the market. During 2005, consumers received higher disposable income which augments their consumption pattern. In this light, the housing companies during those period had predicted that housing consumption will greatly increased by 2006 causing them to produce above average number of housing units in the market by the end of 2005. Unfortunately, during the last quarter of 2005, consumers began receiving lower wages which caused the depletion of their disposable income. As a result, there were surplus of supply of housing units in the market due to false prediction of the housing companies.
Prices of housing unit’s starts to rise as the surplus continue to materialize in the market, see Appendix 2. Moreover, mortgage houses start to increases their interest rates as the consequence of the continuous rapid fluctuations of the US economy. It has been identified during the first part of this paper that mortgages played vital role on the stability of the housing industry. And with the increase on the interest rate of mortgages, there is a minimal chance for housing industry to easily recover from its current instability.
To make the things lighter for the members of the housing industries, they started to lay off workers in order to minimize their production costs due to budget constraints. Actually, it is not only the housing sector that performed laying-off of workers, mortgage lending industries, real estate and construction industries as a whole implemented that said costs minimization strategy, see Appendix 3.
` With the down turn on the housing industry as well as the domestic consumption and other industries in the market, surely, the stability of the GDP is already on its brink of rapid depletion and the federal government would surely find it hard to solve the root of the problem. The only industry in the economy that performs well despite of the instability of the entire economy would be the international trading sector wherein it is the only sector in the economy that keeps the country from further economic down turn. This is the reason why a lot of market analysts and economists are predicting that the US economy will already be facing economic recession in the next coming years.
Cox, W., & Utt, R. D. (2001). Smart Growth, Housing Costs, and Homeownership. Retrieved February 29, from www.heritage.org/Research/SmartGrowth/bg1426.cfm