Influences of the Housing Market

Factors Influencing Housing Demand

Key Terms: Scarcity, Supply, Demand/Law of, Surplus, Willingness to Buy

After the great recession of 2007, many people around the country found themselves unable to make mortgage payments on their homes for a host of reasons: Dried-up credit lines and loss of personal wealth if they were invested heavily in the stock market, amongst other investment options. This caused the housing market around the country to become flooded with foreclosed homes (homes repossessed by a person's mortgage creditor). Because a lot of property was now bank-owned, the banks needed to offload this property quickly to avoid taking a bigger financial hit than they needed to in terms of maintenance, taxes etc. while trying to sell the homes. They priced these homes to sell fast; hence the lower selling prices. This also makes sense because most people searching for homes were not nearly as solvent as they once were and could afford more square footage with these lower priced homes.

The lower priced housing market falls under the economic principle of scarcity. Depending on how scarce a product is, the price, supply and demand will adjust accordingly as it is valued higher or lower by consumers. Right now, housing isn't a scarce resource and according to the law of demand, will have a lower price. In general, the law of demand tells us that if there is a lot of a certain product, in this case, houses, prices will be low. And if there is a small amount of product available, the price will rise. The first scenario classifies the housing crisis; a lot of homes hit the market but yet few could afford what they wanted, were unemployed, or wanted to get it cheaper by waiting, therefore few were purchased. In figure 1, this supply and demand curve illustrates what has transpired in the housing market.

Depicted below is a model of the housing market in the Philadelphia region and reflected throughout most of the United States. The city has a market in which the willingness to sell and quantity supplied far outweigh the willingness to buy and the quantity demanded. We will say for example, in 2005 when a 2000 square foot home was in high demand it may have sold for $150,000 and as demand for that particular model rose, the price did as well, but when the bubble burst, foreclosures were imminent, and jobs were on the decline, the model started to show something much different. As the economy was affected by the recession, the demand for the homes people really wanted declined and the homes available were priced much higher than buyers were willing to pay due to unforeseen economic status. The graph below is indicative