Today recession’s hardest hit industry is real estate, especially the housing market.
Homeowners are forced to take foreclosure route or take bad loan options offered by particularly non-traditional lenders.
How The Sub-Prime Lending Crisis Affects Borrowers, a knol by Cole Collins describe a not-so-pretty picture of vicious cycle of lenders, borrowers, and the national economy problems.
Mr. Collins explained that although the real estate industry offered what seems like easy money before the recession and the free fall of housing value today, the potential risks are often overlooked, and the risks are ‘matured’ today.
He further explained:
Unfortunately, as the falling economy affected the home values and the loss of theoretical equity ruined sub-prime mortgage lenders, the sub-prime crisis is now preventing the larger national economy from an easy rebound. It’s a vicious circle with no end in sight.
The cycle that prolong today’s recession is explained by Mr. Collins, as follow: Homes continue to be foreclosed upon, resulting fewer potential home-owners are willing to take on the risk. This only hurts home values. As real estate sits for years on the market unsold, not only does this cause slipping home values, but also construction of new housing. All of this, including damaged dollar value, prevents an economic recovery from recession.
Then, how to break the cycle? According to Mr. Collins:
Earnings must rise to meet the growing recessionary inflation and… unemployment should be kept to minimal levels.
That, partly, will provide traction to managing the loan interest rate hikes. However important, breaking the cycle is a major problem and will not be an easy task, even for big country, such as United States.
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