The Relationship between Stock Market Prices and Macroeconomic Variables

Document Type:Essay

Subject Area:Finance

Document 1

The two basic ways contributes roughly between 15 % and 18 % of the American GDP. Essentially, the residential investment aspect contributes about 4 % of the gross domestic product and comprises among other activities building of new individual family as well as multifamily homes, residential upgrade and furnishing as well as brokerage costs. On the other hand, the commercial aspect of housing contributes a good percentage to the economy, coming at an average of 14 % of the total GDP. This income comprises total rents and associated services paid by clients, as well as payment of utilities. Mainly these are housing aspects such as retail spaces, stalls, malls, executive offices as well as apartments and manufacturing yards and storage go downs (Waggle, Doug and Gisung 461). To their owners, these helps to generate incomes in millions of dollars to them. By providing families with housing, they are able to reap great savings and thus able to amass wealth in the long run through residential ownership plans. The sector employs a considerable number of Americans in the construction component, given that it is largely labor oriented. The American economy has a dark past as far the 2008 recession is concerned. A big fall in housing construction is noted to have created vast loss of jobs, hence heightened unemployment. Important Housing Indices The above said organs assist in computing and providing important metrics understanding the performance of the sector in different administrative units of the economy. These parameters include the national sales of both new and existing homes, median prices, housing affordability index, inventory of unsold homes at different times, as well as average mortgage rates, mortgage applications over time, unemployment, population characteristics like growth and inflation trends.

Sign up to view the full document!

All the above indices are closely interrelated, with one of each affecting another or several of them. Unemployment and inflation trends are two major indicators which impact on the rest. The two can influence the affordability index, mortgage applications and the median prices. People can only be able to apply for mortgages to finance their home ownership plans if they have jobs. Also, moderate inflation rates helps to maintain the prices stable. With stable median prices, a good number of the people can afford mortgages to buy the homes, hence reducing the inventory of the unsold homes (Waggle, Doug and Gisung 471). If the inventory of existing homes goes down, new homes can be constructed, resulting in incomes both to owners and those employed in the construction sector. Mortgage rates rose 0. followed by the Midwest region at 7.

Sign up to view the full document!

Northeast at 6. and lastly the South region which had a small 5. increase in home prices. Based on this, therefore, the affordability index reduced region wise. New homes are rising slowly at a rate which has been able to rise the inventory of existing homes are currently up 0. percent (Brealey, Richard, Stewart, Myers and Franklin 49). There are plenty of potential homebuyers interested entering in the housing market as rates continue to rise. There is job growth and incomes are rising but still not at the pace of home prices. New construction is on the rise however low inventory remains a concern due to the pressure it puts on home prices. percent, thereby moving from 8. million units to just 5. million units. The year 2007 was followed succeeded by a prolonged economic recession that began in 2008 through 2011 (K.

Sign up to view the full document!

During the recession period the median sales prices maintained a gradual drop reaching an all-time bottom of 170, 000 USD with some dropping by over 25 % below the peak closes. e. Affordability index in relation to unsold home inventory and Demand & Supply Mechanisms Affordability is influenced by median home prices, median incomes, personal preferences, mortgage rates and inflation rates. Favorable figures of the above factors also implies greater affordability index, thus can result in more demand for homebuyers. It can help reduce inventory of unsold home units, and also promote construction of new homes which are far much relevant in the computation of the GDP. a. The Philips curve suggests an inverse graphical relationship between inflation and unemployment index in the short run. Basically, from the theory, high inflation is when unemployment becomes low (Brigham, Eugene and Joel, 2012).

Sign up to view the full document!

This is largely because of the presumption that high inflation induces growth prospects in the economy through sustainable development which then creates job. The use economy, recovering from a prolonged recession, seems stable. Therefore, in consideration of the random walk theory, the projections provided by various high level on inflation and unemployment rates may not hold. For potential home owners, this will give them a near certain expectation of the future of the economy. Mortgage providers usually require the interest rates be seasonally adjusted with inflation rates to curb them against interest rate risks, especially at a time when the U. S is in a serious economic recovery phase. Therefore, the real interest rates have to be adjusted for inflation by deducting the inflation rate from the nominal interest (Węgrzyn and Tomasz 2013).

Sign up to view the full document!

This is possible through the fisher equation mechanism. compared to 2016 reaching 1,480,000 houses. The national census bureau has reported a deficiency in supply of existing homes even with the higher jobs that has led to improved wages. Low Mortgage Interest Rates The mortgage rates have remained low and stable, for a better period in all regions of the USA, therefore, the affordability of the home loans has been enhanced. Both the 30 year fixed mortgage rates and the 15 year average fixed mortgage rates dropped from 4. and 3. Usually this, do not last long and may lead to inaccurate GDP statistics. The housing market has remained stable, even though median prices for existing homes continue to rise, it has been marked by growing sales and massive construction activity. With further expectations of robust job creation and especially low-slung mortgage rates, the speculative price bubbles have a limited chance to thrive.

Sign up to view the full document!

The new tax law has even nailed hard the prospects of speculative investors who may have wanted to trigger a false growth in the ratio of homebuyer’s demand to investment houses demand. Works Cited Bodie, Zvi, Alex Kane, and Alan J. com/doi/full/10. j. x Brigham, Eugene F. and Joel F. Houston.  European Financial Systems 2013. Proceedings of the 10 th International Scientific Conference. muni. cz/do/econ/soubory/konference/efs/Sbornik_2013. pdf#page=356.

Sign up to view the full document!

From $10 to earn access

Only on Studyloop

Original template

Downloadable