Econ 521

Business cycles are alternating rises and declines in the level of economic activity sometime over several years. The cycle I will focus on is recession. Recession is a period of decline in total output, income and employment. This cycle usually lasts 6 months or more and is marked by the widespread contraction of business activity in many sectors of the economy. Along with declines in real GDP significant increases in unemployment occur. (text book chapter 26 page 521) GDP is Gross domestic product is the value of all final goods and services produced in an economy in a given year. According to the new york times “The slump in home prices from the end of 2005 to the end of 2006 was the biggest year over year drop since the National Association of Realtors started keeping track in 1982.” (New York Times) With employment at a all time high 13.5% in 2008 the real estate market suffered very bad. (US housing market crash to result in the 2nd great depression feb 23,2007 by mike whitney) unemployment plays a major roll in the housing market failure. When consumers are unemployed many are unable to afford mortgage and the demand to purchase a new home goes down. Also if consumers fear they will become unemployed they will pass on taking the risk of buying a new home. Two factors contributed to the previous housing crash and that was raising interest rates, and the raise in unemployment. Rising unemployment will contribute to lower house prices, especially when combined with another factor such as higher interest rates or shortage of finance. Falling house prices can exacerbate the problem of unemployment. When house prices fall, consumer spending declines leading to lower economic growth and therefore higher unemployment. Therefore there is a negative spiral effect of falling prices and unemployment( unemployment and housing market Aug 20,2008)

IN 2009 the housing market rose 10.1% which shows beginning signs of stabilization. President Obama created the $8,000 first...