(Optional) - Research Paper Example

Despite the billions of dollars infused in federal stimulus bills such as the JOBS (Jumpstart our Business Startups) Act, the economy is still in fragile health; even the Federal Reserve Bank has employed all the monetary tools at its disposal to revive the economy, such as a continuing a low-interest rate regime and the use of quantitative easing programs to pump more money into the economic system. The American economy is one of the largest in the world but its main foreign market of Europe is in a financial and banking crisis itself.

In other words, there is no hope for most American firms to export their way out of the recession, as the global economy is also weak. The United States of America is also facing various financial crises, such as in the retirement savings system which saw 401k savings accounts wiped out by the collapse of stock markets. Demand is also weak, as consumer spending is adversely affected by the loss of confidence. This paper examines a vital sector of the United States economy, the housing sector.

It is a vital component of the construction industry, which is a major driver of the domestic economy. Construction, in particular residential housing is a substantial contributor to jobs, investments, and income levels as it employs a good number of workers. The housing sector is not fully recovered from the housing bubble, in which prices grew so fast but collapsed. Discussion America is an industrialized country, and so its economy is largely dependent on the many industries comprising its national economy.

An example is the automobile industry that is a major component of the overall manufacturing sector. In this regard, the housing industry is also a major component of the construction industry. New housing construction is a closely-watched economic indicator because it reflects the health of the United States economy. Home building (private housing starts) is a good barometer of industrial domestic production. If people have stable and well-paying jobs, and they also have confidence in the future, then it follows more people will invest and buy new homes to build their families.

The housing sector had been one of the worst-hit in the recession which followed the bursting of the economic bubble in housing prices. As stated earlier, house prices rose fast in the past few years immediately preceding the crisis; the bubble was caused by speculation. The Federal Reserved Board and its economists missed the bubble, arguing it is very hard to detect as it is developing because it is no different from any ordinary economic growth. But in hindsight, there were many warning signs which were missed which could have triggered the corrective actions needed for a “soft landing” in which prices will go down gradually instead of a sudden bursting where the prices of residential homes deflated from pricey levels.

A housing bubble occurs when the prices of homes diverge markedly from their basic or intrinsic values, the price at which a house should be worth and not on its market price as it becomes subject to speculation. The housing sector has not recovered fully from this bubble as many home mortgages had been foreclosed and most house prices had fallen below their loan value. In other words, homeowners are mostly underwater, in the sense they now owe the banks a larger loan amount than what their houses are worth on the market.

This has a bad dampening effect on housing demand, although there are now a few encouraging signs.