Though we will cover the topic in greater detail, it goes without saying that the real estate market plays a vital role in the US economy. It is one of the greatest sources for savings and wealth to Americans far and wide. Moreover, commercial real estate provides a huge investment opportunity for millions each year.
Real Estate’s Ripple Effect
Real estate has a far-reaching impact on areas of the US economy that are not necessarily measured. When the real estate market sees a decline, for instance, there are generally declines in real estate prices to follow.
That means lower values on homes, which dictates how many sellers there may be. It also means a reduction in home equity loans and even a reduction in consumer spending when homeowners are tied up in their own home projects.
The 2008 Recession
Perhaps there is no better example of the impact that the real estate market has than the 2008 financial crisis. Home prices tumbled, which triggered a major downturn. The decline was so bad that it began earning comparisons to the 1929 depression.
Declines between 10% and 15% are shown to be enough to potentially eliminate the equity that homeowners have. In states such as Nevada, Florida, and Louisiana, that became the reality for homeowners.
Impact on Bonds
A stunning amount of loans issued between 2005 and 2007 were classified as subprime. Basically, it means that the borrowers were more likely to default than those who are considered to be prime borrowers.
The banks folded those subprime mortgages into their mortgage-backed securities and sold them as safe investments to corporations, pension funds, and retirees. The problem was that, when borrowers defaulted, those mortgage-backed securities now had questionable value.
When many investors tried to exercise a credit default swap, firms such as AIG started to run out of cash, which necessitated the need for the Federal Reserve to bail it out. The domino effect led to the worst financial crisis in 80 years and a load of uncertainty.