Sunday, September 1, 2019
Residential Housing Essay
KB Home, one of the major housing companies in the market made a statement telling the public that they do not see housing sector to stabilize by this year. Number of housing companies has been acquiring great losses by the end of 2005 as disposable income of consumers’ declines as the consequence of lowering down of per capita income in the economy. According to the President and Chief Executive Officer of KB Home, Jeffrey Mezger, they have suffered to a staggering loss of nearly $10 per share during the first quarter of 2007 (Steverman 1).            Deutsche Bank’s economists, Peter Hopper, said that the housing correction works sluggishly just like a ‘slow-motion train wreck’ which made worse the housing sector of the economy. Moreover, the said loss of KB Home worse than what they have expected. Analysts expects around $7 loss per share which is very far from the $10 per share loss accounted last quarter. Therefore, with the further worsening of the stock prices in the stock market, this only means that there will be no improvement in the coming first quarter of 2008.            To make the situation worse, there has been a rumor in the market regarding the bankruptcy of Countrywide which supplies loans and mortgages worth 2 million and 9 million respectively. Countrywide suffered from 25 percent losses as of January 8 of this year. Meaning, there would be a shortage on the supply of loan and mortgages in the financial market just in case Countrywide is really approaching to bankruptcy. Moreover, the shortage of supply of loans and mortgages in the economy will only worsen the purchasing power of the consumers, giving way for a further deterioration of demand to housing industry.            One possible reason behind the turmoil in the housing industry would be the oversupply of homes in the market creating a pressure for its prices to decline. By the time price level of housing units starts to decline, profitability of housing companies begins to deteriorate giving way for experiencing a low return on investment in the next quarter. Driven by speculation, investors will start to pull out their stocks in the housing sector causing stock prices to turn down. In this regard, the connection between the oversupply of housing unit in the market with the deterioration of stock prices is already established. Moreover, it is not only the oversupply of housing units in the market that caused the instability of the housing sector. The growing competition also adds up to the growth of the problem. At the end of the day, market analysts still believes that housing sector will not recover this year based from the current degree of losses that housing companies and financial institutions had experienced on the last quarter of 2007. Analysis            It is true that the turmoil in the housing sector started during the last quarter of 2005 when consumers have high disposable income. During then, consumers spent more in the housing market attracting the housing companies to produce more house units next quarter. By the start of the first quarter of 2006, per capita income of consumers starts to decline giving them a limited disposable income for housing sector. At this point, the housing industry experienced oversupply of housing units since companies did not anticipate the deterioration of consumer’s disposable income. The said oversupply caused the price level of the housing companies to decline causing the return on investment to depreciate which later on forced stock holder to withdraw their stocks in the market. The increasing competition in the housing sector also add up to the lowering down of housing unit prices since companies in this industry starts to compete each other through price competition. Meaning, housing companies tries to lower down the prices of their home units in order to attract more customers.            The negative effects of eh oversupply of housing units will not be that severe if there is only adequate number of financial institutions that will provide loans and mortgages to uplift the purchasing power of the consumers, therefore, improving the demand on the housing industry. But the problem now would be, even financial lenders is also having a hard time providing loans and mortgages due to the low income level of consumers in the market which imposes the threat of bankruptcy to the financial lenders.            It would be best if the government would start making action by offering low interest rate on credit. The federal bank must structuralize a special credit scheme for housing sector customers, e.g. low interest rate on borrowing or longer payment period, in order to solve the problem of over supply on the said industry.            Another way by which the government could solve this instability of housing sector would be to provide financial aids to Countrywide which, as what have already pointed out during the first part of the paper, plays a major role in uplifting the purchasing power of consumers though provision of loans and mortgages that can be used in purchasing housing units. The said government aid may be in the form of monetary of fiscal Moreover, the government could also increase the wage rate of the workers in the economy in order to improve the current level of disposable incomes of consumers in the market. By the time the disposable income of consumers increase, they will now have enough money to purchase housing units which will solve the problem regarding the oversupply of home units. Works Cited Steverman, Ben â€Å"Housing: A Fresh Jolt of Bad News.†8 January 2008. Business Week. 11 February 2008 .
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