Failures in the food market certainly exist (thanks, government subsidies), and food is certainly a necessity. But the housing market possesses a longer reach than most other markets. To understand the extensive influence of this market, it helps to imagine one's self in the position of the producers and buyers. To produce a house, the producer will need materials, or factors of production. Some possible production factors include: concrete, brick, wood/lumber, plumbing/pipes, wiring, insulation, carpeting, light fixtures, windows/glass, tile flooring, drywall, and many, many more. These factors of production also have their own factors of production. For example, wiring may rely on materials like copper. The producer must also rely on the transportation market, which relies on the energy market. And let's not forget the massive amounts of labor hours required to build a house. Throw in the labor market. From the consumers perspective, a new house will often be accompanied by new products to be used in the house. This could include appliances, electronics, furniture, cookware, curtains, or beds. It is hard to think of another market that draws from so many other materials and products. If we think of the economy as a pyramid, the housing market would be near the top. Since housing is naturally a large market (everyone wants a place to live), many of its underlying markets are pegged with it. This is how the housing market crisis was able to put our entire economy into a recession. A crash in the housing market means a crash for the economy.
Now that we have established its importance, how did the housing market crash play out? Let's start with the Community Reinvestment Act. The CRA, initiated in 1977 and strengthened in the 90s, created incentives for banks to give out loans to low-income families. This meant more credit available for taking out loans and buying houses. As more houses were built and bought, prices were rising, and the economy was thriving. When the Federal Reserve, in response to short recession in 2001, increased the money supply multiple times, investors saw the rising home prices as a signal to invest more in the market. The housing bubble continued to grow.
This may sound great, but the story obviously didn't end happily. However, it's important to realize that many of these loans for houses wouldn't have been given without interference in the market, and for good reason. These were not secure loans, and the economy wasn't as thriving as the low interest rate suggested. As a result, many defaulted on their loans, the houses were repossessed, and we were left with a colossal surplus in the housing market. As logic follows, with so many empty houses, there is no need to build new ones. Thus, the housing market came to a halt, bringing all of its underlying markets with it.
So there you have it - the tale of how the housing market, along with some help from the U.S. government and the Federal Reserve, was able to bring down the entire world economy on its own.
