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Monday, December 31, 2012

Essay on Unemployment and Housing Crisis

Essay on Unemployment and Housing Crisis

The housing problem in America can be briefly described as a result of the decline of a household’s purchasing capacity which is reflective of its ability to pay house mortgages (Bernanke, 2012). Needless to say, a decline in a household’s purchasing capacity would result to its failure to maintain paying mortgages which, in turn, would result to foreclosures. Since March 2011 up to March 2012, foreclosure rates have gone up to 47% and have continuously risen to 7% the following month. Among the highest number of foreclosed homes was found in the State of California totaling to 31,434. Among other states with high foreclosure percentage included Florida, Texas, Michigan, and Ohio. (Fulmer, 2009)

Besides house foreclosure rates, another indicator that there is, indeed, a housing problem in the U.S. is the decline of house prices. Figure 1 below provides a summary of house prices starting from the Great Depression, to the rise of its prices in 2006 and, now, a continuous decline in prices. Owing to the basic economic principle of Law of Supply and Demand, a decline in price would mean a decline in demand. This reflects highly not only of homebuyer’s choice but purchasing capacity: 

For the United States as a whole, declines on this scale are unprecedented since the Great Depression. In the aggregate, more than $7 trillion in home equity (the difference between aggregate home values and mortgage debt owed by homeowners)--more than half of the aggregate home equity that existed in early 2006--has been lost. Further, the ratio of home equity to disposable personal income has declined to 55 percent… far below levels seen since this data series began in 1950. (Bernanke, 2012)

It would seem, at its surface, that decline in house prices would remedy the problem of housing. However, this only aggregates it since homeowners already paying their respective mortgages who would now seek to resell their homes to pay foreclosures and move to houses which require less mortgage rates is unable to do so due the drop of their house’s value, in consonance with the drop in real estate pricing. This results to negative equity:

Negative equity is a problem because it constrains a homeowner' s ability to remedy financial difficulties. When house prices were rising, borrowers facing payment difficulties could avoid default by selling their homes or refinancing into new mortgages. However, when house prices started falling and net equity started turning negative, many borrowers lost the ability to refinance their mortgages or sell their homes. Nonprime mortgages were most sensitive to house price declines, as many of these mortgages required little or no down payment and hence provided a limited buffer against falling house prices. (Bernanke, 2012)

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At this point, it must now be identified that the American housing problem is not due to the lack of structure but due to the lack of purchasing power among homeowners or among home-seekers. At its face, it may be argued that the housing problem is due to the lack of affordable housing structures. Yet, it must be noted that this would be resultant to a mere housing problem but to subsidy problem since housing costs are uniform, corresponding to houses of the same kind.

The indicators presented above, however, are merely identified as direct indicators of causes of housing. A common factor which leads to these however is the lack of purchasing power among consumers and homeowners. Purchasing power derived principally from income. The average American derives income from employment. Due to recent trends in unemployment, however, it is evident that the unemployment rate (9.4% in January of 2011, down to 8.3% in July of 2012) corresponds to the increase in housing problems in America. Current studies are not only showing a proportional relationship between the two but also a mutual relationship where unemployment causes housing problems and housing problems furthers cases of unemployment.

Works Cited

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