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The housing market affects the economy in a bunch of ways:
- If you have a lot of construction going on, you create jobs for a lot of people. A fair amount of unemployment has been linked to a slump in construction.
- When house prices drop, people who own homes are often affected. Lots of people do things like getting home equity loans to buy stuff. If their house price goes down, they can't get as much (if any) of a loan.
- When house prices drop, people feel less rich. If your house used to be worth $250,000 and now it's only worth $150,000 you won't feel as rich. When that happens, you won't want to buy as much stuff. That hurts the economy.
- A drop in house prices has also hit a lot of people who were planning to refinance their loans for better rates. Now that their homes aren't worth as much, banks won't refinance and the owners are stuck with loans they can't pay off (because they had adjustable rate mortgages whose rates are going up).
To look at things from somewhat of the opposite perspective, other than the loss of construction jobs, if you have a booming housing market, some of the following happen:
- The first is that people generally feel that the equity in their home is increasing, making them more comfortable with the idea of home equity loans to pay for various things they don't have the cash for.
- People also feel like they don't have to worry about tomorrow since tomorrow their house will be worth more, so if things really go south, they can sell and be ok. This generally leads to decreased saving and again, increased spending.
- The other thing about the housing market is that if it appears to be consistently going up (particularly at the rates which it appeared to be increasing) the increase in speculation in terms of looking at housing as an investment.
All of these things can also simply help drive money to go around the economy faster, and if you read up on your economic theory, faster circulating dollars in a way have a similar effect to there actually being more dollars circulating around. This has all kinds of interesting effects, among them some positive and some negative, but all you have to do to find all kinds of great and interesting (and at times frightening) examples is read up on your recent economic history.
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