A Macroeconomic Perspective on the Real Estate Housing Industry in Today's Economy

A Macroeconomic Perspective on the Real Estate Housing Industry in Today's Economy:

Effects of Wealth, Rational Expectations, Monetary Policy, Interest Rate, Unemployment, and Income on Housing Purchases

The purpose of this paper is to explore and analyze the role of the Fed's intervention with monetary policies to stimulate the purchases of housing and increased mortgage lending. I agree with the Keynesian belief (Democratic) of short term intervention to stimulate the economy as opposed to the classical (Republican) viewpoint of not reacting to the real estate mortgage problems because the system will correct itself. Recently, to move the IS (AD) to the right, which occurs as a result of monetary and/or fiscal policies, TARP was enacted to inject $700 billion dollars to help financial institutions, and a stimulus package of $787 billion was added to assist other sectors. Moreover, investors' expectations are low, the unemployment rate has increased, mortgage loans are more difficult to obtain, and lower interest rates have not stimulated real estate purchases and development yet. In today's real estate market, coupled with a high unemployment rate, a housing surplus exists because Y >C+I+G.

Clemmit (2007) described the mortgage crisis which led to the financial disaster at a macroeconomic level:

An era of unregulated financial markets has resulted in an unprecedented global financial disaster. Trillions of dollars have been allocated towards financial recovery in the United States alone. How did we get to this point? The unlikely culprit was residential mortgages in the U.S. Regulatory bodies took no action as irresponsibility and greed fueled this market's rapid growth. These seemingly secure investments, backed by mortgages on residences in the United States, were purchased by millions of unwary and sophisticated investors on an unparalleled international scale. The investment banks, anxious to ride a wave of profitability, created more and riskier investments as the bubble inflated. In 2006, the housing market peaked and began its crash, bringing with it all of the purchasers of the mortgage backed financial instruments. All the players in the residential housing market were devastated. Homeowners lost their homes. Mortgage lenders disappeared. Investment banks either went out of business, or merely survived thanks to government infusions of cash. Investors in some mortgage backed securities lost virtually all the value of their investment. And stock markets around the world crashed with a resounding thud, wiping out vast amounts of wealth.

Macroeconomics helps to devise policies to improve economic performance of economic events, the real estate housing bust occurred not only because of unemployment, but also because of the real estate appraisal and