When the housing price bubble burst, there were some obvious effects on the economy, and some that were not so obvious. Explain these

Answer 1

When the housing price bubble burst, obviously prices plunged, and fell more severely in markets that were previously boom markets. The price of an average American home fell by 12-25%, depending on how you measure it. Plunging prices made both buying and building new homes far less attractive. For sale signs sprouted up everywhere; inventories of unsold houses piled up, driving prices down further. Contractors stopped building new homes, and residential construction dropped by a remarkable 56% between the winter of 2005-06 and the spring of 2009 when it hit rock bottom.

Less obvious, because spending on newly constructed homes is part of investment, GDP growth slowed in late 2005 . A great deal of consumer wealth was destroyed in the process, particularly because a house is the single most expensive thing many Americans will ever own. Their wealth reduced, they reduced their consumer spending.

Even worse, because houses are purchased mainly with borrowed funds (mortgages), if the buyer fails to pay the mortgage, the bank can repossess the home. And because prices of houses were falling from their previously inflated highs, many houses were worth less than the amount owed on the mortgage. And so banks also lost money.