Disequilibrium in the Housing Market

Document Type

Article

Publication Date

1-24-2011

Abstract

One of the main effects of the housing-market disequilibrium is a persistent 9 to 10 percent unemployment rate. This disequilibrium is reflected in the ratio of the median house price to median family income. By financing housing purchases with credit creation and borrowing from future income-based growth, nearly a quarter of homeowners have come to owe more than their houses are worth. As a result, the need to pay down this debt hampers their demand for goods, leading to a balance-sheet recession. While postwar recessions typically also had origins in housing, they were much less severe. When the economy did recover in those times, it was accompanied by a recovery in housing that is not happening now. Thus, the sustainability of the current recovery is uncertain.

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This article was originally published in Newsweek on January 24, 2011.

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Newsweek

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