Question

What are the effects of the housing bubble burst on the housing market, labor market, credit market, and the aggregate economy?

Answer 1

Housing bubbles, but even homeowners and their personal finances, have a direct effect on the real estate market. The effect a bubble can have on the economy ( e.g. interest rates, credit conditions, and securitization practises) can cause individuals to find ways to keep up with their mortgage payments as they unexpectedly turn around and get rough. Some will also have to dig deeper into their pockets, just to maintain their houses, using insurance and retirement assets. Others are going bankrupt and foreclosing.

Once it is known that a higher-than - average rise in house prices is originally caused by a shock in demand, we ought to wonder what the causes of the demand increase are. Several options exist:

A raise in total economic activity and increased wealth that puts more discretionary income in the pockets of consumers and promotes home ownershipAn increase in the population or demographic segment of the population joining the housing marketA low general interest rate, particularly short-term interest rates, that makes homes more affordable

In general economic activity, the slowdown leads to less disposable income, lack of work or less available work, which lowers housing demand. Demand is depleted, putting supply and demand into balance and slowing the fast rate of house price inflation that some consumers , especially speculators, rely on to keep their acquisitions sustainable or lucrative. A contraction is extremely risky. Many that rely on it to afford their homes can lose their homes as rapid price inflation stagnates, adding more supply to the market.

The bottom line is that credit conditions are tightened as defaults grow, easy mortgage borrowing is no longer affordable, demand declines, supply rises, speculators exit the market, and prices decline.