Housing Market

Many economists thought that when the U.S. housing boom ended, so would the overall economic boom. Yet housing starts and sales are down from peak levels, and while various reports indicate housing prices are still ahead of year-earlier levels, that masks the fact prices indeed have declined over the past six months. So why has the decline in housing not yet reduced the GDP and real growth rate of the U.S. economy? A declining housing market can negatively affect the economy in three ways. First and most obvious, there are fewer construction workers, fewer purchases of construction materials, and reduced income for brokers. Second, home-equity refinancing is reduced as prices level off and then decline, which, in turn, reduces consumer spending. Third, defaults and foreclosures increase, not only wiping out individuals who bought more house than they can afford, but many financial institutions as well. It is the third effect that will finally bring the economy down.

The good news, it won't happen for several years, well past our ability to forecast. The rash of defaults and foreclosures usually peaks about three years after interest rates rise and housing prices level off and then decline (Evans, M. 2006). History has proven this to the economy, this current process of interested rate hikes started in 2005, suggesting that, the major negative impact of a declining housing market will not his until 2008. There will be some modest decline in the real growth this year and next, but an increase in real GDP (BEA, 2006).

GDP slowdown may give Fed pause, according to businessweek.com (Englund, M. MacDonald R. 2006). The U.S. economy grew at a disappointing 2.5% rate last quarter, raising market expectations that the Fed will suspend interest rate hikes. U.S. gross domestic product for the quarter underperformed. The underperformance of second quarter GDP relative to our expectations was largely a function of a big fixed investment due to a shortfall in the volatile equipment and software component, which fell 1%.

The supply and demand

For every housing transaction there is a seller and a buyer. The seller will decided the price that they are willing to accept for the property and that they think the property can achieve. The buyer will decide what they are willing to pay for a property. However there are factors that will heavily influence the demand and supply of houses. These factors are: Demographic Income Price of Housing, Interest Rate Cost and Availability of credit /Mortgage, Consumer preferences, Price of substitutes Price of compliments.

Supply of housing: In order to produce a new housing supply the following factors are required: Land Labour Other Inputs (Electricity, Building Materials).The quantity of housing produced for sales is determined in relation to the cost of the factors mentioned above. Second hand housing supply is determined by the number of people willing to sell their properties and the factors described above don't affect this.

Demand and Supply: Every time that the demand of houses increases faster than the supply of house, the price tends to go ...