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Freeman's Blog

December 6, 2011

Spur Economic GrowthIn this post, I’d like to discuss some of the problems standing in the way of economic growth. US home prices have declined 33% since they peaked in 2006. In fact, most homeowners have seen property values drop further and faster than they did during the great depression! In past recessions, the housing market was credited with boosting the economy because new homes require the hiring of individuals for construction and older homes require a number of goods and services before new homeowners are able to enjoy it.

During this recession, though, the housing market is having a major impact on economic recovery as a whole. As it struggles to regain its footing, the US economy is experiencing slower than expected growth. While previous recessions enjoyed around 15% of growth from the housing market, it has only contributed to about 4% of the national GDP. So, why is the housing market dropping the ball this time around?

It’s estimated that 4.5 million homes are either 3 months behind on their mortgage or have officially entered foreclosure proceedings. Compare that to the historic average of around 1 million homes in this predicament and it paints a pretty clear picture: until these foreclosure properties are cleared out, our nation cannot recover fully. Unfortunately, the high unemployment rate, slow lender reaction time, and a reluctance to negotiate with defaulting homeowners is making the problem worse with each passing day.

Can anything be done to fix this terrible housing crisis? Not directly. Still, over time, modest broad economic growth may be able to pull the housing market back on its feet, which in turn will spur greater economic growth. It will take time for the housing market to recover, and until that happens our economy won’t be as strong as it has been in the past.