Macroeconomic Analysis: U.S. Housing Industry
For the past years, the housing market continuous to perform badly and even home builders expects no improvement on the performance of the said industry for the next coming year based from the recent data that they collected. According to the data collected from the Commerce Department, the housing market already experienced its worst ever performance last May 2004 as the volume of construction of new homes and apartments fell.
Moreover, it was identified that those regions that experienced rapid growth during the housing boom like California, Florida, Arizona, and Nevada were the one’s severely affected by the said turmoil in the housing market (Schoen 1). Though there were still other market players which believe that the Housing market would still recover sooner, other would find it hard to say that they would expect brighter condition for the housing market this year.
Based from the survey conducted by the National Association of Home Builders, the outlook of most builders in the housing industry for the month of June in 2007 cut down to the lowest level since 1991 and this further negatively influences the expectations of othe4r builders in the market. This unstable condition of the housing market becomes worst by the time the foreclosures of the mortgage firms which provides an avenue towards the increase of unsold inventories of housing market; plus, credit terms of lenders starts to tightened for the home builders as the latter become more financially unstable and there is less to expect on the housing market for the next coming periods.
In general, the worse condition of the housing market become worse due to the lack of financial sources in order to back up their expenses as the industry continuous to perform badly and the demand of housing units sluggishly improve for the past years.
Based from the article it is clear that the housing industry has been performing bad for the past years due to the depreciation of the consumer demand for housing units in the market see Appendix 1. Well, using the classical demand and supply relationship in order to fully understand this market phenomenon. Due to the decrease in the disposable income of the consumers in the market as the result of lower income for every American household by the start of 2006, consumers tend to consume less on various goods and services in the market including the housing market. In 2005, households receive higher income which gave them enough room to increase their consumption in the market. A lot of industries, including the housing industry, expected that the said increase in the consumption of consumers would continue to next year  and they start to produce more housing units in order to meet the future demand of the consumers. But to their dismay, by the end of 2005, wages of every workers in the market started to decline that triggered the consumers to consume less by the start of 2006 leaving various industries with surpluses of goods like housing units. As a result, home builders started to incur loses as sales and profitability plunges due to the decline of consumer demand for housing units.
A house is considered to be a normal good, or those goods that are sensitive to price changes. Consumers easily control their consumption on the housing market because of this characteristic of the said good. In other words, the demand on the housing market is elastic since the quantity demanded for a house can be easily affected by its price level or vice versa. Like for the case of the housing market, since the demand of consumers fell due to their limited disposable income plus the fact that there were surpluses on housing units in the market, prices of housing units quickly decreased in order for the housing companies to attract consumers to buy their products.
Price level of housing units in the domestic market will continue to decrease until such time wherein the consumers could already afford to buy such. If this scenario would continue, then there is a great possibility for the prices of the housing units in the market to increase again giving change for the housing companies to recover from the said economic problem. But the point is, it would take time before the housing companies would afford to provide the market prices that consumers are willing to pay due to the low disposable income of the latter. The housing market could only wait for the disposable income of their target consumers to increase or just borrow money to mortgage firms in order to finance the losses that they incur from the depression happening in the housing market.
With regards to the mortgage firms, they started to think twice on lending funds to housing companies since they outlook for the housing industry is still not in the good condition. Mortgage firms become more sceptical on the ability of the housing companies to payback since a lot of housing firms are starting to close and bankrupt due to the continues deterioration of consumer demand for the housing market as the result of their limited disposable income. Moreover, lending firms are starting to implement tight credit terms to housing companies which further worsens the condition of the housing market. At the end of the day, housing companies are left with less available funds to finance their daily transactions and operation which forces them to lay out some of their workers in order to cut operational costs.
As the number of workers lose their jobs, consumers in the market becomes more and more bounded on their limited disposable income and this laying-off of workers of various housing companies would only contribute to the worsening condition of domestic consumption as the households of these workers becomes more conscious on their consumption patterns. It was identified that the volume of housing lay-offs already reached 21,000 by August 2007 as compared to 1,000 lay-offs during the same month on 2006 see Appendix 2. This significant increase in the number of lay-offs happened due to the instability of the housing market would only add up to the burden of the entire economy of the United States by further lowering down the domestic consumption of the entire economy as they receive no income after they were laid-off to their works. At the end of the day, the entire industries in the American domestic market will suffer from the deterioration of consumer’s disposable income caused by the decrease on the wages of American workers by the end of 2005. This is one of the reasons why various economists and market analysts predict badly on the future performance of the housing market for the next coming period. It’s like a chain reaction started by the decline in the wages of workers in the market going down to the instability of various industries in the domestic market.
If only the financial sector would cooperate in order for the housing companies would have enough funds to finance their daily transactions and operations, lay-offs in the housing market would not be that large as compared previous years this large volume of lay-offs happened last 2007 triggered for the inequality on the wages of workers in the housing industry since the housing companies would now have the power to bargain for lower wages to their workers just to stabilize their financial condition in the market and every company in the housing market would demand wages differently from others which creates wage inequality in the housing industry since every company in the said industry would have different bargaining power to their workers.
Due to this, it is clear that there are a lot of macroeconomic factors that are involved even to only one economic issue like the case of the housing industry stability.
Alternatives and Evaluation
Based from the given arguments and scenarios above, it is clear that one of the possible way to solve the problem on the housing market would be to increase the wages of every workers in the economy which will provide enough avenue towards the improvement of the disposable income of every households in the market. By the time the disposable income of consumers in the market increases, then, their consumption pattern will once again increase thereby improving the profitability of various industries in the domestic market including the housing industry. The only draw back in this alternative would be, the government would find it hard to implement this strategy especially companies in the market do not have enough funds to increase the wages of their workers. But this problem can be solved if the government would provide subsidies to those companies that would increase the wages of their workers like lower tax rate or lower land rent.
Another possible solution to this instability of housing market would be the implementation of monetary policy through mandating the federal banks to lower down their interest rate on borrowing in order to provide enough room for various companies in the industry to have sources of funds to finance their operations. In this regard, the housing industry would no longer be dependent on the mortgage firms and can now borrow money to the federal banks of U.S. it is being expected that this alternative would give enough room for the housing companies not to lay-off their workers or at least minimize the number of workers that they will lay-out in order to stabilize the financial condition of their company. The only draw back in this implementation of this alternative would be- the government would release much of its money reserves from the vaults of the federal banks which might trigger an increase on the inflation rate. The government must determine the optimal amount of money that they can lend to domestic borrowers in order to prevent the prices of domestic goods to increase robustly as the number of money that circulates in the economy increases.
Based from the pros and cons of the identified alternatives to combat the instability of the housing industry, it would be better for the entire economy of the U.S. to implement the increase of wages of American workers in the market plus the provision of government subsidies to those companies that would follow the said policy of the government. This solution would provide long term solution to the problem of housing industry as compared to the lowering down of interest rates on borrowing which could only trigger another economic problem if once implemented improperly- higher inflation rate. In other words, in terms of the level of potential risk, the first alternative is much favourable as compared to the second alternative despite of the fact that they could both provide sustainable solution to the instability of the housing industry. Furthermore, the second alternative would only endanger the financial sector of the economy since the federal banks would be left with less available money reserves to make foreign transactions.
With the instability of the housing industry due to the limited disposable income of consumers in the market, various macroeconomic factors contribute for the condition of the said industry to become worse. Well, that worsening of the housing industry due to various macroeconomic factors such as wages, interest rate, and elasticity of demand was triggered primarily by the wrong market speculation of the investors in 2005. If only the housing companies did not produce much housing units in 2005 just to meet the supposedly ‘future’ demand of the domestic market for housing units, then, they would not experience much financial instability. In this regard, with the aid of fiscal and monetary policies of the government, which is the increase of wages of American workers plus the provision of subsidies to those companies that would comply to the said policy, the problem on the housing industry will now be solved slowly but surely.
Schoen, John. W. “Housing Industry Still Looking for the Bottom.” 19 June 2007. Msnbc.com. 2 April 2008 <http://www.msnbc.msn.com/id/19311316/>.