America's Strugling Housing Market

It is no secret that our nations economy is in rough shape. Amidst various government programs and the chaos of the upcoming November Elections, our nation’s various markets continue to struggle, including America’s housing market. The very first line of the article explains the situation the best; “THE storm clouds have been gathering for months.” As a mode of government intervention, The Federal Housing Tax Credit was applied to home purchases, which occurred on or between January 1^st, 2009 to April 30^th, 2010. With the expiration of the tax credit at the end of April, the numbers, which are generated By Case-Shiller as a three month moving average (meaning August’s numbers actually reflect the sales of June, July, and August) now show the home price index ticking downwards.

Case-Shiller generates two different indexes, the broadest index being their 20-city survey. 19 /20 cities experienced decreases in housing prices. Five different cities had decreases of <1%, with the largest decrease coming from Las Vegas at 2.2%. The decrease in housing prices across America indicates over all there is a decrease in a demand for housing. The lack of demand in housing across America in turn generates an increase in the supply of housing. Since the supply of housing outweighs the demand of housing, it can be said that the housing market currently has a surplus, or an excess of goods.

While considering that the values across the nation are falling, another piece of data that is interesting to take a look at the change in renting across the nation. The Case-Shiller Home Price Index indicates that home prices fell from 2006-2009 (only to raise to for a little while before starting to fall once again with the expiration of the Federal Housing Tax Credit). During the same period, The Joint Center for Housing Studies of Harvard University, reported an increase, roughly 10%, in new renters. Within the article The Economist publishes a tool that allows readers to look at the average American income over several years. Looking the graph as a whole and then looking at the graph from 2006-2009, interestingly it can be seen that the average income was rising until it began to fall in 2006. Falling house prices are a result of the decrease in demand.

The ideas of normal goods verses inferior goods and substitutional goods vs. complimentary in conjunction with the definition of the “Basic Needs Approach” can help make better sense of the information in the above paragraph. The “Basic Needs Approach” is a tool used to measure poverty, which takes a look at peoples access to the three basic needs, food, clothing, and shelter; i.e. shelter is one cost, which can not just simply be cut from one’s life. As consumers’ incomes increase they graduate to purchasing higher priced goods (normal goods) and when their income falls consumers purchase more goods at lower prices (inferior goods). So because incomes have been falling since 2006, consumers have been seeing an increase in demand for the inferior good (renting) and a decrease in demand for the normal good (purchasing). Purchasing shelter (normal) verses renting shelter (inferior) are substitutes; they compete with one another. These two goods are substitutional goods because even though price of buying a home is falling, since income is falling and the consumer can’t afford the good, they substitute away from purchasing a home towards renting a home.

The public has heard that the housing market has been doing poorly but by having even some understanding of economics it all be comes so much easier to understand just exactly why.

http://www.economist.com/blogs/freeexchange/2010/10/housing_markets

http://www.claybennett.com/pages2/slump.html

http://www.jchs.harvard.edu/publications/markets/son2010/son2010.pdf