The recent global economic crisis had a major impact on various industries, a majority of which are still reeling from the aftermath of this historic economic meltdown. The housing market is no exception. Consequently, the housing market across various states in the United States remains quite relatively weak as home builders ponder their next course of action. This research paper attempts to examine the housing market concerning the observed shift in the demand and supply in the market. In addition, there are several negatives as well as positive externalities that have characterized the housing market in the face of the recent global economic crisis.
These shall also be addressed in the research paper. Wage inequality also has a major impact on the housing market, and it shall also be examined by the research paper. The positive and negative economic influences that characterize the housing market shall also be explored.
Factors affecting the housing industry
The housing industry is affected by many factors which may vary from changes in income of customer’s income to changes in mortgage prices, shifts and price elasticity of supply-demand, positive and negative externalities, wages inequality and monetary and fiscal policies. Each of these is discussed in detail in the following part of the essay.
Shift and price elasticity of supply and demand
Demand refers to the number of goods that consumers are willing and able to buy at any given conditions which can either be the price of other related commodities, tastes and preferences, future prices expected and population changes. For instance when the population increases, the demand for more housing increases and as a result, the housing industry will be forced to build more houses. On the other hand, when the future prices of houses are expected to be high, the industry will build more houses and consumers will buy more due to fear of the rise in prices. Just like in any other industry, the housing market is not immune to the issue of supply and demand.
Or example, when the mortgage rates are relatively low, and there is a correspondingly increase in terms of the income earned by the populace, it may then be expected that members of such a populace shall demand an increasingly higher number of housing units in the future. This is often buoyed even further at a time when the principal mortgage is at or near zero. What this means is that there is a swing on the demand curve towards the right, thanks to increased income on the one hand, and complements whose price is in the downward trend. In economic terms, the housing market could be said to be experiencing an inelastic demand.
Price elasticity within a market occurs at a time when there is a disparity between, on the one hand, the quantity of a good on-demand and on the other hand, the price of such a good. Should the ensuing change be very minimal we then talk of inelastic demand. Such kinds of goods are said to be necessary. This is so with the housing industry since housing is a basic necessity for consumers and people will continue to demand the house provided all other factors are kept constant. In contrast, the supply of houses in the housing industry shall also be dependent on the willingness and capability of the market.
This means that there has to be a high demand for houses for the supply of this product to increase in tandem with the need. Certain conditions are however necessary for this to happen. These conditions can be prices of goods, factors of production (which can include transportation and costs of raw materials), technology and price of other related goods. An increase in the price of the material used for construction will costs the housing industry a lot of money which in turn will increase the prices of the housing or reduce the number of houses they build. Since they cannot reduce the number of housing as housing is basic to consumers they will increase the prices of owning a house (price theory: supply and demand (‘Price Theory’, n.d, para.7).
Positive and Negative Externalities
Externalities refer to the extra cost incurred as a result of engaging in a certain business enterprise or benefit accrued which are not included in the market price. They can either be positive or negative. Positive externalities refer to the benefit that the society or individual get while negative externalities refer to the extra cost incurred by an individual or society as a result of the production of a good and are related to the effect that production will have on the environment.
In the case of the housing industry, externalities refer to those activities around the location of a home which include the land around the home or neighbours and can either be positive or negative. Some of the positive externalities accruing from the housing industry include creating better habitat, and as more people own houses the society benefits since the homeowners become actively involved in the activities of the society as there is a sense of belongingness. In addition, there is improvement in hygiene due to reduction in congestion in towns as more people own houses.
Due to an increase in demand for the houses the prices of the houses increases and this leads to more income for the industry which will lead to expansion of the industry. Lastly, there is economic growth as new jobs are created and this, in turn, leads to the development of a country. As the country develops more and more houses are demanded and therefore the industry continues to build extra houses.
However, despite the many positive externalities affecting the housing industry, there are also negative externalities associated with it. These include deforestation in search for building materials which in turn lower the amount of rain received and thus affect the productivity of a nation-leading to low income. In addition, deforestation leads to scarcity of materials required by the housing industry leading to an increase in their price and hence the industry uses a lot of money in construction. On the other hand, due to the high demand of the land required for building new houses, land which initially served as a habitat for animals is developed which leaves the animals without a habitat.
This causes many animals to die or migrate and as a result, there is a decrease in the amount of income a country got from wildlife and this continues to decrease the economic growth of a country. In addition, there is noise, water and air pollution during construction and this is a health hazard to people and animals which in turn reduces productivity. The government budget is squeezed since the government needs to allocate some money to local municipalities for providing social amenities like water and sanitation and infrastructures to these newly built homes.
It refers to the gap in wages earned by different groups of people. For example skilled and unskilled, high school graduates and college graduates, those working in developing and developed countries. In addition, it may also refer to the difference in the wages earned by an individual at one time compared to another time. In the housing industry, wages inequality is due to this sector hiring immigrants instead of professionals as they are paid less amount of money with no taxes as compared to professionals. As the housing industry creates more jobs, workers compete for the same job in the same place and as a result, the wages for workers continues to decrease as there is an oversupply of employment (Droke, 2005, p.10).
Monetary and fiscal policies
Monetary and fiscal policies will bring economic growth when administered well. Monetary policy is the tool that the government uses to regulate interests rates and money supply influencing demand through one of its bodies known as the Federal Reserve System (Feds). Feds uses different tools to implement monetary policies which include instructing the bank to retain a certain percentage of money as a reserve and this reduces the money supply. Feds buy and sells government security in addition to controlling the interests rates that banks borrow from it thus controlling fund rates. These affect the economy in many ways, for instance when interests rates are high, consumers buy more and when the money supply is high there is inflation and in the long run monetary policies decreases job opportunities.
Fiscal policy refers to how the government controls the way it spends its money. This affects the demand for goods. For example, when the government reduces its spending, the demand equals supply and this ensures that there is no inflation.
The housing industry has been affected so much by the above-discussed factors as shown below. When there is inflation the prices of the houses increase and reduces the number of houses bought. On the other hand, when there is an increase in the interests rates charged to homebuyers as a result of borrowing money for building houses the buying rate is reduced and vice versa. Moreover, the housing industry creates jobs and as a result, the country becomes rich and can therefore lead money to borrowers at a low interest rate hence increases the consumer’s spending. In addition, workers have more money which they can use in buying houses and can buy houses and also borrow loans.
Many economic factors can affect the housing industry in negative ways. Some of these include a high level of unemployment, when people do not have a source of income, the little money they get from donations and one they had saved can only be used to meet basic needs and in terms of housing, this money may not be enough for one to buy own house. This is so because one cannot borrow money from banks to build his own house as they do not have security and therefore they will live in a very cheap rented house. Low wages also harm housing since with low wages one’s spending is reduced and money maybe for meeting very basic needs like food and so not build their own house.
Moreover one cannot borrow from banks as the government may not rely on that little income as a source of security. In addition low levels of growth and low per capita income also influence the housing industry negatively. An increase in interest’s rates charged by the banks when one is borrowing and an increase in the price of raw materials required by the housing industry also affects it negatively.
The economy affects the success of the housing industry in many ways both positively and negatively in that when the economy drops many people lose their jobs due to the closure of many industries. As a result, those people who were able to pay their monthly premiums are no longer able and have to look for other ways of refinancing and in case they are unable to pay a lending company may close down reducing the accessibility of customers to loans. This in turn will reduce the demand of buying housing as people are only able to meet their necessities and therefore do not prioritize owning a house and this is only a dream to many people.
In addition, those who had borrowed money for building houses and were later deployed and are unable to pay mortgages may make it close down or suffer a lot of losses. As a result, the lending company may tend to raise the interests rates to recover these losses making it even more of a problem to those who want to borrow from it. However, even though the interest rates may not be high and mortgages are appealing to most people, still many people may not be in a position to afford due to joblessness and lack of qualifications for the same.
When mortgages tighten the procedures that one go through before they lend some money, few buyers will be attracted and as a result, many houses which were built for selling may remain empty or are rented which was not the initial purpose of building them. This discourages building industries when they are not able to meet their target.
As housing industries are planning on building houses they have to select wisely where to build it, which type of house to build and how much the house will be sold at depending on the location of the house. For instance, the houses in the town centre will cost more than houses in rural areas due to extra costs of social amenities in the town centre. This will call the housing industry to do research and therefore this will cost it extra money.
When there is positive economic growth, there is an increase in the amount of income and as a result, many people will buy housing because either they can afford it or are in a position to get mortgages as they can meet their monthly obligations. This in turn will motivate the housing industry to continue building more houses as there are hopes that they will be bought going on with present trends. In addition since most of the borrowers will be in a position to meet their monthly obligation, the lending company will always have money to lend and as a result, will encourage more on of the housing industry leading to more job creations and the cycle repeats itself. It encourages more borrowers and hence people will continue buying their own houses. This leads to the expansion of the housing industry.
Droke, C. (2005). A Slow Down in the Homebuilding Sector. Web.
Price Theory: Supply&Demand. Web.