Tuesday, November 12, 2013

Supply and Demand in the Housing Market

The basic principle of economics is the idea of supply and demand. For every product, there is a certain amount people are willing to buy for a certain price (demand curve) as well as a certain amount of the product others are willing to produce for that price (supply curve). The point at which these two point meet is called equilibrium (figure 1). The same is true with the housing market.
Figure 1

There are those who have been concerned with housing prices since the recession hit our economy. Robert Shiller, a Yale professor and winner of a Nobel Prize for economics, said in an interview: “I don’t expect it [housing] to come back. Not with the same force.” (Rogers 2013)

However, data from August in his housing index, the Case-Shiller housing index, shows a 12.8% change in housing prices. The index looks at data from 20 cities across the nation including Las Vegas, Miami, Phoenix, and Dallas. These cities, with the exception of Dallas, showed double-digit increases this year. Dallas was not really affected by the recession, but still continues to improve. Since housing prices are recovering in most areas, it can easily be said that the housing market will continue to improve, at least for now. (Rogers 2013)

Figure 2
                                           One big concern for the housing market is increasing interest rates because they can usually influence the willingness of people to buy houses. A higher interest rate causes higher monthly payments. As one can see from the chart (figure 2), interest rates have been steadily increasing since May. But, house prices seem to be unaffected by the increasing rates. Christopher Matthews, a writer and reporter for TIME magazine, says there are a couple of reasons interest rates have not been affected yet. One is that more people are using cash to buy houses. Wealthy homeowners and other investors do not feel like getting involved with mortgages and pay cash. Another reason interest rates are not affected is that these increasing rates may be indicating an improving economy. A stronger economy generally causes higher interest rates, but can also cause price appreciation even with higher interest. (Matthews, 2013)

Works Cited:

Matthews, Christopher. Rising Interest Rates and the Fate of the Housing Market. 28 8 2013. Web page. 20 10 2013. <http://business.time.com/2013/08/28/rising-interest-rates-and-the-fate-of-the-housing-market/>.

Rogers, Alison. Overcoming Pessimism, Housing Prices Continue to Skyrocket. 29 10 2013. Web page. 29 10 2013. <http://business.time.com/2013/10/29/overcoming-pessimism-housing-prices-continue-to-skyrocket/>.


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