Term Paper on "Family Home Ownership This Report Uses"

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Other insights such as the prime interest rate and how changes in total mortgage interest rates affect single-family homeownership. The report touches upon monetary and fiscal policy changes, major external events aboard and contributions to our economy. However, the main objective of the report was to demonstrate how various housing industry aspects affect the Gross Domestic Product while also creating unique and measurable trends and cycles in housing industry variables such as interest rates, mortgage origination volumes, and more.

Introduction

The main objective of this report is to provide information on the various housing industry aspects and their affect on the Gross Domestic Product. This report examines single family home ownership and tries to explain the forces behind the sustained rise in the rate of homeownership in the United States and the overall impact on the nation's economy. The existing macroeconomic signs seem to indicate that we as a nation are at a turning point for the United States' economy as was demonstrated by the final quarter of the twentieth century.

The extreme changes of that period gave a ray of hope that the world was in for a new economic upswing. but, events such as the ending of a long bull market, a redirecting of the nation's fiscal policies and the terroristic attacks on September 11, 2001, put an end to the vote of confidence and quickly reversed our nation to a point where concerns and doubt pushed us into bleak situation.

This report tries to examine the single family housing industry as it pertains to the United States Gross Domestic Product to see what can be learned from economic fundamentals to help influence future choices. The report also attempts to analyze specific housing industry statistics to attempt to forecast the shape of the economy over the course of the next few years as well as attempting to predict some of the consequences the real estate industry may face.

Through primary and secondary sources, aspects of single family home ownership in the United States will be used to understand the history and affects of home ownership on the economy and the United States Gross Domestic Product. Single family home ownership is also used in this research paper to track some of the associated statistics and affects on domestic economic trends, governmental policy and fiscal changes.

The period of review is based on the economic boom period between 1996 and 2000 and the downturn between 2000 and 2004. Through both economical and statistical data, the report hones in on the single family home ownership aspects of the housing industry and aggregate demand. The report also provides insights into prime and mortgage interest rates and their affect on homeownership as well as monetary and fiscal policy changes, major external events aboard and contributions to our economy.

The Industry

Recently, the housing industry has been moving along at an unprecedented rate even though the United States economy has been sputtering. The housing industry success rates have been attributed to various factors. Some more influential factors are:

Historically low mortgage interest rates

Strong demand coupled with low inventories of unsold existing homes

New construction

Long-term investment philosophy

While some slippage of housing market activity was anticipated during the fourth quarter of 2001 and the first quarter of 2002, along with weakness in general economic activity, housing is nevertheless well-positioned to lead the economy forward in 2002." (NAHB) as both long-term mortgage interest rates and the prime interest rate remain at all time lows, American home buyers look to take advantage of their increased purchasing power.

Limitations

As the National Association of Home Builders point out, interest rates of thirty year long-term mortgages lows on average and adjustable rate mortgages were even lower at around five percent. These very low interest rates permit new and existing families to not only buy first time homes, they are moving right into more expensive homes that historically could only be purchased by second and third time around buyers who had accumulated equity as collateral.

This phenomenon has stimulated the United States economy through two different types of sales. In other words, the direct sales transaction is only one way to boost the economy. The housing boom also has indirect economic advantages as a result of related purchases and expenditures that are needed for a family to settle into the new nest. Furniture, appliances, utilities, and even sprinkler systems and lawn services are all positively affected by single family home sales. "The recent, dramatic rise in home values also should provide a boost to other sectors of the nation's economy as consumers put their equity to work." (Sicks, "Home Builders Group Sees Mild Recession")

Although the National Association of Home Builders wants everyone to see through rose colored glasses a picture that the group paints, there are also some less obvious down sides to existing housing industry trends. Low interest rates have adverse affects on individuals who bought their homes at earlier times at high levels of interest and therefore in a position to sell at these lower interest rates. "But anyone who bought a home during that period of inflated prices probably has found that selling at much of a profit hasn't been easy since 1990. Many sellers cannot even cover the cost of settlement without going to their savings accounts." (Sicks, "Area Home Sales Good, Not Great")

Other trade off is an apparent 'economy of scales' affects. "Moreover, for at least the past 20 years, the ever-increasing amounts of capital used to finance the sale and resale of existing houses at ever-higher prices has come at the direct expense of investment needed to maintain America's industries, infrastructure, and general standard of living. As a result, not only are today's younger Americans paying unprecedented prices for housing but they are earning less real wages than they would have otherwise. In 1973, the average 30-year-old male needed to pay only 21% of his income for the mortgage on a medium-priced house. By 1984, that had jumped to 44%." (Longman)

Today, that percentage continues to increase. As a result, the number of mortgage defaults and foreclosures among lower-income buyers is steadily rising. Sub-prime loans and an ever increasing amount of borrowers who have less than five percent equity can not keep up with the cost of living coupled with mortgages at or near fifty percent of their income. "

History

So how did we get here? We have to look back to the pre and post World War II era for answers to some of the questions affecting us today. "The Depression made clear in the minds of policymakers in the United States the need both to stimulate the economy and to create a new economic order geared towards stability. Turning a 'nation of renters' into a 'nation of owners' was seen as a way of extending the possession of stable assets to the majority of the population. In the United States, Franklin D. Roosevelt introduced a federal initiative to stimulate the private housing market." (Friedman) in 1934, in an effort to restart the depression savaged United States economy, Congress passed a main function of President Roosevelt's housing legislation called the National Housing Act. The Act established the Federal Housing Administration. The National Housing Act made an attempt to eliminate short-term mortgages so as to eliminate the opportunity for lenders foreclosing at the end of periods as short as two or three years.

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