The Great Recession, Wall Street and Housing Building Fatigue

One of the most horrifying recessions in American history which jeopardized the US economy from 2007 to 2009 began with the bursting of the housing bubble. This most unfortunate event affected millions of people in the U.S. With severe implications on the unemployment rate, the job losses during the recession played a big role in increasing poverty. A drop in family incomes resulting from this financial meltdown resulted in decreased consumer spending.

The decline in consumption and the turmoil in the financial market caused by the housing building fatigue had negative implications on business investment as well. With a sharp decline in business investment and consumer spending, the unemployment rate rose to unprecedented levels, and as a result, approximately 8.4 million jobs were lost.

While the macroeconomic factors can be held responsible for causing the financial crisis, the structural issues were grave and deeper – especially the mechanism of demand growth followed by the U.S economy. The substantial decline in consumer confidence along with an increase in interest rates resulted in the grim situation to metastasize, spreading rapidly through all levels of the economy, which eventually led to the complete failure of the financial market. And before anyone could realize, the nightmare became real. By 2008, things had become worse. Banks were reluctant to even lend to each other, and the announcement of bankruptcy by Lehman Brothers proved to be the last nail in the coffin.

The debt to income ratio for American households increased from 1980 to 2007, and as it happened the prices had already began to slow down. It had a disastrous effect on the heavily indebted household sector and consumer spending. Consumers began cost cutting especially on new constructions. The consequence was a significant decline in household demand, leading to the Great Recession.

Needless to say, housing was linked with several other macroeconomic factors. During the consumer age, mortgage debt was the most popular form of borrowing. The easy access to mortgage loans especially sub-prime mortgage loans extended credit to people that did not have impressive financial records. This was the major cause of the attractiveness of home ownership. Economists were expecting the trend to continue for a long period. People continued to invest in bigger homes and the rate of home renovations was pretty high during that period.

The increase in demand further pushed the prices up, validating the assumptions of economic gurus. The borrowing trend continued and more Americans borrowed against equity in their houses. Financial markets were getting bigger and better returns as the home prices were climbing and investors were receiving greater returns. 

Things were looking positive but then in 2006, the bubble burst affecting millions of Americans. There was a slight increase in short-term interest rates and it became difficult for risk averse mortgage borrowers to refinance that was critical to maintain the bubble and to keep the consumer demand steady. As a result, most homeowners were forced to sell their homes. With the fall in home prices, millions of Americans defaulted on mortgages, consumer spending dropped and construction of new homes declined sharply, triggering the Great Recession – the most horrifying incident in the American history.