Variation in Real Estate Prices and Macroeconomic Performance Assignment

Variation in Real Estate Prices and Macroeconomic Performance - Assignment Example The performance of the housing sector significantly affects the general economy’s performance. Most theories, however, presume that it is only the macroeconomic factors that affect the variations in house prices and not the reverse. According to the vector autoregressive (VAR) model built by Baffoe - Bonnie, there are complete relations between the housing sector and the general economy (Case et al. 15). The theory asserts that macroeconomic variables usually cause cycles in the prices of houses and the number of houses sold. If not brought to control, these effects may have adverse implications on the economy. Historically, changes in the prices of the real estate have been linked to changes in consumption in various ways. In the past, the slump in housing led to many empty houses and growing joblessness. Uncertainty about the consequences of declining home prices was also common in the past years. In the past - just like today, consumption or rather spending has been subject to people’s income. Economists Karl E. Case, John M. Quigley and Robert J. Shiller made annual observations in 14 countries since the past 25 years and in some U.S. states quarterly in the 1980s and 1990s. Their observation was that some the future incomes were kept in the assets, stocks, bonds, and property, where most people keep their riches (Case et al. 15). A drop in asset values made many homeowners poorer, so they lowered their expenditure and raised savings. When the assets grew, they spent more. The theoretical arguments of the vector autoregressive (VAR) model are thus valid. Economists have varying opinions on the consequences of varying house prices among the consumers. According to Carroll et al. (69), they disagree as to whether Americans will reduce their spending slowly or rapidly. On one side optimists, argue that the links between housing wealth and spending are much the same as for any other type of wealth, such as shares. They say