Housing Market WILL cause a recession

The housing market crisis began with a high rise in housing price (about 80%) and subprime lending which became about 35% of the credit market. Subprime lending is the practice of lending to people who had poor credit history. Furthermore, the interest rates were at around 1%. However, when lending slowed down and interest rates went up, many couldn’t pay mortgages. As a result, the demand for housing was reduced and home prices fell. There was a 30% decline in housing activity that could reduce the GDP growth by 1.5 percentage points, according to the American Enterprise Institute Newsletter. Now, lenders are tightening standards and are making it increasingly difficult for people to obtain loans. In fact, Merrill Lynch rates the chances of a recession at 65%. According to the Washington Post, the Fed has already cut federal funds rate (what banks pay to borrow money from each other overnight) from 5.25% to 4.75% to keep liquidity alive and keep consumer confidence high.

Although the housing market is part of the business cycle, the housing market has a tendency to fall for years. One in five subprime loans issued between 2005 and 2006 are projected to fail and at least four subprime loan lenders filed for bankruptcy. The impact will be likely to spread elsewhere as a result of the adjustable rate mortgages and zero down payments. Countrywide, the biggest mortgage financier, is to cut 12,000 jobs and Lehman Brothers are to cut 2,000 jobs. Also, there are 22,000 less jobs in construction and 46,000 less jobs in manufacturing as a result of the housing market crisis. There should be more government intervention, especially from Fannie Mae and Freddie Mac, the nation’s biggest mortgage companies. There should also be stricter regulation of the subprime mortgage market, which Senate Banking Committee Chairman Chris Dodd calls “unconscionable” and “deceptive.”