The real estate sector is a staple element of the U.S economy, and hence its growth or lack thereof can be seen as an indicator of the state of the entire economy. Meanwhile, homes are the main pivot of activity within this sector on one hand, and the general economy on the other hand. When the Chairman of the Federal Reserve Ben Bernanke warned that the housing crisis will continue for some time, he pointed out that the real estate sector hogs 30 percent of the total value of investments made by American consumers. In fact, the residential real estate sector lost 7.6 trillion dollars of its value during the crisis, which represents 32 percent of the real-estate wealth of American consumers in the sense that homes were worth 23.75 trillion dollars on the eve of the crisis and then deteriorated to 16.15 trillion dollars [afterwards]. In general, the real estate sector worldwide attracts a vast range of the activities of the economy, encompassing at least half of the total activities, if not more. For instance, the real estate sector is closely associated with the construction industry, and the industries of cement and its derivatives, iron and metals, wood and plastic, stones, cast concrete, tiles (whether ceramic or quarried decoration stones and marble) and other complementary industries. In addition, this sector employs various types of engineering offices, contractors, real estate developers, and equipping industries, furniture, air conditioning, interior design and electric fittings (…etc.) In other words, this sector employs nearly two thirds of the workforce in a given country, especially skilled workers, tradesmen and non-educated workers. However, the realities of real estate may become an economic disaster, whenever the sector's growth is coupled with artificial demand. During recent decades, U.S household debt has exploded, increasing tenfold in 20 years, from 1396 billion dollars to 12564 billion at the end of the first quarter in 2008, or 28 percent of the total national debt. In parallel, household debt rose from 90 to 160 of the GDP between 1970 and 2006. This is while the savings rate did not exceed one percent of household income. The reason for this is plain and simple. With the rigidity in the income of middle-class wage earners, and the decline in the income of the poorest castes of society, bank loans became the primary leverage for domestic household consumption. In truth, this consumption played a major role in shaping the dynamics of the national economy, when it rose from 67 percent to 72 percent of the GDP between 1975 and 2007 As a result, loans accumulated over 20 years rose from 358 billion dollars to 2593.2 billion dollars, including 915 billion dollars in outstanding credit card advances by March 2008, with many possibly defaulting on a large fraction of this amount. In an unequal society in the developed world, acquiring a home became a form of a guarantee for all wage-earners, while the ownership of property was seen as an ideological motive of the success of the ‘American Way of Life', all as a result of the restricted social mobility due to the rising costs of health insurance (rising 87 percent in 2008 relative to 2000), housing, and education on the one hand (college education costs rose 40 percent), and the lack of an even keel in public policies that exclude some and increase instability, all amid a climate of a lack of social security (4.5 million people without health insurance in 2007). This is not to mention that home owners were able to take a mortgage on their properties in return for loans from banks, or healthcare fees from insurance companies, or to purchase a car, or [loans] during unemployment periods or to pay tuition fees (student loans amounted to 80 billion dollars in 2007). On the other hand, however, the ownership of real estate constituted the main bulk of household debt in the past two decades. Mortgage loans hence rose from 926.5 to 10611 billion dollars in 20 years, or the equivalent of twice the federal debt in 2007, and three quarters of the total household debt. This wide-scale loan process was largely based on the increases in the prices of real estate, in turn stimulated by the low interest rates of the Federal Reserve. However, this form of wealth was largely pushed by unreasonable real estate speculation, dovetailed with surreal price increases, reaching 80 percent between 2000 and 2006, as a general countrywide average. The increase in real estate prices helped real estate owners to acquire new loans, using the ever increasing value of their properties as collateral. Between 2005 and the first quarter of 2008, 3010 billion dollars in mortgage loans were given, helping to create a true house of cards. It is in this context that high-risk loans started to emerge. Given the relative stagnation in middle-class real estate activity, financiers turned to new customers in order to secure high returns, and their choice fell on lower-income families. They proposed ‘unethical' conditions to these families most of the time in order to sell those high-risk, high-interest loans that change in terms and last over a long period of time. These loans made up 40 percent of mortgage loans between 2004 and 2006, with about 600 thousand contracts given out each year. Between 2000 and 2006, these loans were valued at 1200 billion dollars; while not being a very large sum per se, it proved to be disastrous at the onset of the crisis. During this period, the Federal Reserve resorted to the open market to raise interest as part of a strict fiscal policy to curb price increases and maintain a reasonable rate of inflation. This has led to higher premiums for borrowers in the subprime mortgage market where the borrowers are relatively new and hence do not have a good credit history with the banks. Their loans amounted to 100 billion dollars while those investing in real estate sold their homes when their prices rose by 30 percent, but failed to pay back their debts. In light of the catastrophic collapse of real estate, the government distributed bailout packages to help maintain activity in the real estate sector at an acceptable level. But when government assistance ceased, home sales fell by 25 percent, threatening to cause renewed recession, at a time when the consumer continues to suffer from the repercussions of massive losses in his assets swallowed up by the financial crisis. This is not to mention the high rate of unemployment. Banks and customers thus fear a further expansion in credit amid the downturn in real estate prices, and also fear falling into the trap of high interest rates in the future.
