Managerial Economics: Analysis of US Housing Crisis in Global Context

This report provides a comprehensive analysis of the US housing crisis from a managerial economics perspective. It examines the crisis through the lens of various economic concepts, including supply and demand, elasticity, and comparative advantage, using a CNN article as a case study. The report highlights discrepancies in the housing market, government policies, and their impact on the market. It explores the role of government intervention, the effects of reduced foreign investment, and the potential for another financial crisis. The analysis covers key economic factors and theoretical concepts, comparing the US housing market with the supply and demand theory and scarcity. The conclusion emphasizes the rising housing costs, the gap between supply and demand, and the potential for another financial crisis due to low credit ratings and market volatility.

Running head: MANAGERIAL ECONOMICS IN A GLOBAL ENVIRONMENT
Managerial economics in a global environment
Name of the student
Name of the University
Author note

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Table of Contents
Introduction:....................................................................................................................................2
Critical analysis of the article:.........................................................................................................2
Theoretical economic concepts according to the article:.................................................................3
Governmental policy issue to gauge the situation:..........................................................................4
Economic discrepancies of the article:............................................................................................5
Conclusion:......................................................................................................................................6
Reference:........................................................................................................................................8

2MANAGERIAL ECONOMICS IN A GLOBAL ENVIRONMENT
Introduction:
US housing sector crisis is one of the most dared crisis that the world economy has ever
faced since the great depression of 1929 (Kumhof et al. 2015). Due to the subprime mortgage
crisis, record reduction in the housing price has been prevailed in the US economy for almost 6
years (Summers 2015). With successive stimulus package and through policy reforms, US
government has gauged the situation largely; however, according to the purview of the
economists, the country is yet to face another GFC like situation. Through this report, an
economic article “Are we heading toward another subprime mortgage crisis?” published in CNN
will be discussed from the perspective of various economic tools like supply and demand,
scarcity, elasticity and comparative advantage. The report is meant analyse and understand the
language and tools of economic analysis of a contemporary economic news article and find out
how economic tools are used in economic news reports.
Critical analysis of the article:
The selected article highlights the US subprime mortgage situation, where it has
portrayed the pre 2006 and present situation with through the analysis of difference in key
economic factors. The report has pointed that the US economy is presently facing gap in the
demand and supply due to rise in price and substantially ineffective demand (Poole, 2018). In
addition to this, the report highlights that though there is governmental presence to support any
market failure in present day, lack of principal in the market economy is yet to bring in crippling
blow to the economy. This would not only affect the comparative advantage that the US housing
enjoys at present days, moreover hamper the US insurance sector too. Lastly, it is important to
highlight that the report argues lack of active participation of the Fed and rise in rate of interest
in successive quarters is aimed to encourage foreign investment, however volatility is

3MANAGERIAL ECONOMICS IN A GLOBAL ENVIRONMENT
constraining the same from moving in. It will not only hamper the US economy in future but also
can bring in another financial crisis within coming years.
Theoretical economic concepts according to the article:
The chosen article is based on the economic theories like supply and demand, elasticity,
trade and comparative advantage. From the idea of distortion in the housing price and housing
demand promote that there is certain demand and supply gap in the US housing market (Glaeser
and Gyourko 2018). Besides this, the article also highlights that though there is rise in price of
the houses, yet the supplies hasn’t increased as much it should be. In addition to this, it can also
been traced from the article that during 2000 to 2006, housing price of the US market is one of
the lowest in the developed nations, that provided it comparative advantage and it has sourced
much needed foreign investment in the housing sector (Wagner and Wied 2017)). It has lead to
raise the price further and ultimately turn into subprime mortgage bubble.
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
HPI
% Change Over
Figure 1: HPI % change over
Source: (Created by Author)

4MANAGERIAL ECONOMICS IN A GLOBAL ENVIRONMENT
From the figure 1, it can be seen that over the year since 1991, Housing price of US has
been rising since 2006, and then it started to fall. This depicts that, within the period of two
decades, US housing demand has also rose substantially to support the price rise and once there
is market volatility, price started to fall (Ferrero 2015). Since 2013, price started to rise again,
however it fails to penetrate the market as effectively as pre 2006 condition (Poole, 2018).
Governmental policy issue to gauge the situation:
Financial crisis of the US was mainly originated from the lack of market discipline owing
to the presence of huge private investment. Excess supply of the foreign investment lead to rise
in the infrastructural development and on the other hand subprime mortgage took undue
advantage of this development. Due to lack of presence of government in the housing sector,
price of the houses started to sky rocket and once the subprime mortgage bubble busted, it lead
the insurance firms become bankrupted (Mian and Sufi 2015). As a counter measurement,
Fannie and Freddie invested $200 billion in the market to prevent the failure of the Bear. Dodd-
Frank Wall Street Reform was introduced by the Obama government and by the end of 2010;
Consumer Protection Act came into force (Culp 2015). According to the xxx, Federal Housing
Finance Agency was developed by the US government in order to win the confidence of the
domestic mortgage industry through allocating $300 billion fund for the 400,000 homeowners
(Markham 2015). From the economic terms, these reforms can be considered as the government
expenditure, which can enhance the aggregate demand effectively to introduce growth in all the
sectors. In this regard it is also important to mention that, reduction in the foreign investment in
the housing sector due to volatility in the market has hampered the comparative advantage of the
US housing sector. Thus, government was forced to reduce the credit score from 660 to 630 to
provide loans (Agarwal et al. 2015).

5MANAGERIAL ECONOMICS IN A GLOBAL ENVIRONMENT
Economic discrepancies of the article:
According to the economic theory of supply and demand, if there is rise in price, then it
would lead to fall in quantity demanded (considering that the good is normal good), where as the
producers will be willing to produce more output at the enhanced price rate (Azevedo and
Leshno 2016). This can create the excessive supply and lead to fall in the price again.
Figure 2: Median sales price of houses in US
Source: (Kripke 2018)
Comparing the US housing market with the supply and demand theory, it can be seen that
though there is rise in price in present day, number of houses available are falling (Keyens 2016).
From the figure 3, it can be seen that the housing market of the US is lacking in supply though
there is rise in price as shown in the figure 2 above. According to the figure 3, it can be observed
that most of the reputed cities in the US have only 1 house to sale among total available houses,
though there is rise in price. This contradicts the basic law of supply and demand.

6MANAGERIAL ECONOMICS IN A GLOBAL ENVIRONMENT
Figure 3: housing market status of US
Source: (Kripke 2018)
Analysing the market condition from the scare resource perspective, it can be seen that
housing being a normal good is inelastic in nature (Atalay et al. 2016). According to the law of
elasticity, if a there is rise in price of normal good, then it will hamper the consumption slightly
compared to inferior and luxury good (Harrison 2016). However, considering the case of US
housing market, it can be seen that rising price of the affordable housing has effectively reduced
the demand of the houses. Kripke (2018) highlights that, maiden buyers of the houses in US has
fallen from 40% to 30% during last decade due to rise in price of the available houses.
Conclusion:
Above discussion has portrayed that with rise in the cost of houses in the US economy,
and the affordable housing lobby backed by the Fed is again leading the US economy on the
verge of destruction. Housing price is enhancing day by day and the gap between the supply and
demand is falling apart largely. With reduction in the capital flow in the US economy it is ought
to face another financial crisis. Presently with stimuli to the rise in price due to the US backing in
the affordable housing project, the economy is yet to face another breakdown because credit

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rating is low that has stopped the capital inflow and volatility in the market is another factor that
can lead to deterioration of the situation.

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Reference:
Agarwal, S., Chomsisengphet, S., Mahoney, N. and Stroebel, J., 2015. Do banks pass through
credit expansions? The marginal profitability of consumer lending during the great recession.
Atalay, K., Barrett, G. and Edwards, F., 2016. Housing wealth effects on labour supply: evidence
from Australia. Mimeo, University of Sydney.
Azevedo, E.M. and Leshno, J.D., 2016. A supply and demand framework for two-sided
matching markets. Journal of Political Economy, 124(5), pp.1235-1268.
Culp, C.L., 2015. OTC-Cleared Derivatives: Benefits, Costs, and Implications of the'Dodd-Frank
Wall Street Reform and Consumer Protection Act'.
Ferrero, A., 2015. House price booms, current account deficits, and low interest rates. Journal of
Money, Credit and Banking, 47(S1), pp.261-293.
Glaeser, E. and Gyourko, J., 2018. The economic implications of housing supply. Journal of
Economic Perspectives, 32(1), pp.3-30.
Harrison, J., 2016. Law and Economics in a Nutshell. West Academic.
Keynes, J.M., 2016. General theory of employment, interest and money. Atlantic Publishers &
Dist.
Kripke, P. (2018). Are we headed for another housing collapse?. [online] New York Post.
Available at: https://nypost.com/2017/09/02/are-we-headed-for-another-housing-collapse/
[Accessed 18 Mar. 2018].
Kumhof, M., Rancière, R. and Winant, P., 2015. Inequality, leverage, and crises. American
Economic Review, 105(3), pp.1217-45.
Markham, J.W., 2015. A financial history of modern US corporate scandals: From Enron to
reform. Routledge.

9MANAGERIAL ECONOMICS IN A GLOBAL ENVIRONMENT
Mian, A. and Sufi, A., 2015. House of debt: How they (and you) caused the Great Recession,
and how we can prevent it from happening again. University of Chicago Press.
Poole, W. (2018). Are we heading toward another subprime mortgage crisis?. [online] CNN.
Available at: https://edition.cnn.com/2017/03/14/opinions/risk-of-another-housing-crisis-poole/
index.html [Accessed 18 Mar. 2018].
Summers, L.H., 2015. Demand side secular stagnation. American Economic Review, 105(5),
pp.60-65.
Wagner, M. and Wied, D., 2017. Consistent Monitoring of Cointegrating Relationships: The US
Housing Market and the Subprime Crisis. Journal of Time Series Analysis, 38(6), pp.960-980.
Link to the newspaper article: https://edition.cnn.com/2017/03/14/opinions/risk-of-another-
housing-crisis-poole/index.html