Microeconomics in the Housing Industry

 Microeconomics in the Housing Industry

Introduction

Brief History of U.S. Housing Market

In 50 years, government stakeholders, citizens, and policy analysts heeded to the proclamation that homeownership is vital to all partakers of the American dream. The idea was much embraced as it laid a credible framework for the development of the nation.

Consequently, different bills were set in motion to pave the way for a majority of the population to own houses. New institutions were established, government subsidies put in place, and tax laws were enacted to reduce the cost of loans issued by financial institutions. These shifts within the economy, coupled up with the decline in unemployment, increased demand for homes. Following immediately after the altercation was an expansion on the housing industry and increased prices, which was aimed at maximizing profits.

Indeed, an unprecedented number of benefits streamed form the variety of rules and regulations enacted for the population to thrive in homeownership. For example, the aggregate of the people that acquired new homes rose from an estimated 64 percent, which was prevalent during the 1970s to the out-standing 69 percent at the inception of 2006. The 5 percent increase translates to approximately 6 million new homeowners (Lombra, 2012).

Elasticity

Elasticity in the supply of homes is an essential factor in indicating how the real estate industry will respond to the increase in demand for houses or the boom in home prices (Saiz, 2008). December 2007 was the onset of a rather unexpected recession within the American economy. The dwindling of the housing industry was perceived to be a contributory factor and a resultant effect of the wave of recession.

Among the factors which contributed to the decline in the housing industry, adjustments in the lending standards were prominent. The financial lending institutions never paid detailed attention to the potential of homeowners to pay back their mortgage. They wanted to take charge of the financial market by having a more comprehensive scope within the economy. Moreover, they were experiencing huge returns on investment and pressure from the competition, which turned out to be favourable to their activities. Indeed, the tight knot on the lending standard had been loosened as the decades of 2000 came along.

Before the onset of the 2008 recession, interest rates were reasonably lucrative following the restructuring in regulation to make a move towards home acquisition affordable to a large population. They granted loans across the country to fast track the increasingly widening markets like Nevada, California, Florida, and Arizona. Moreover, they had ingrained in them that extending the loans to the broader scope acted as security against failure from a specific geographical area. Consequently, the demand for homes ensued, and the stakeholders in the industry continued to avail houses.

This paper is geared towards unravelling the topics below to help in comprehending the nature of the U.S. housing industry.

Affordability 

Affordability in housing is an estimate of the cost of housing when put against the income of an individual or family. The cost of housing is at the forefront of budgets in most households; therefore, factors influencing affordability also alters the cost of housing.

Demographics

Demographics is critical in the flexibility of prices in the home markets. The majority of the housing demand population in America is composed of those between the ages of 20-30 years and has its pinnacle at 40 years.

Location

The location has a direct influence on the market value of a house. Every place holds varying values when considered in terms of traffic, accessibility, proximity to green areas, and neighbourhood. The location also has a bearing on the issue price and the option of having a house.

Reflection on the Economy

Wrongly structured housing strategies play a crucial role in orchestrating financial and economic crises. Therefore, the paper sheds light on how housing ought to be planned for a stable economic environment.

Comparison to International Markets

The American dream is coined in owning a house that appears not to relate to other countries on a global scale. The home market is predicted to experience a surge in demand internationally, which is attributed to the increase in millennials who need to acquire homes.

Methods Used in the Home buying process

The process of buying a house can be tedious as the parties involved might exude most traits aimed at self-interests. Understanding the designated procedures is critical in making an informed decision.

The housing economy is directly affected by the factors mentioned above; furthermore, the following points are intended to elaborate on exactly how this impact is made.

Factors Affecting the Housing Industry

Affordability

Housing affordability has become a matter of concern later in us, and it is being discussed together with other severe issues like shifting demographics, fluctuating market prices, and many more. When is a household considered to be having an affordability problem? When a tenant pays a certain amount of their income for housing a considerably high rate, then they have an affordability problem. The percentage payable as rent varies depending on many variables, including; location, demographics, and market. The united states have a housing affordability problem that needs immediate attention. The main problem is on the supply side. The standard definition of housing affordability is set by the U.S. Department of Housing and urban development. It states that households that pay more than 30% of their income on housing are burdened by affordability. In contrast, those households that pay less than 30% are not overwhelmed and are living an affordable life far as accommodation is concerned (Goodman,2001).

Affordability influences many factors, some being the residual income after payment of rent. The amount of income that an individual earns is a determinant to the type of housing that they can afford as long as the sum of the lease is not burdensome. In this view, the location of occupancy plays a role as to who becomes your neighbour. A high-end neighbourhood attracts particular individuals in the market; most of these individuals are characterized by high residual income that can afford them some luxury. Such locations are associated with few or sparse populations of individuals with high purchasing power. Additionally, rapid economic growth since as much income is made available much of it is spent spurring cash flows hence economic development of the neighbouring populations.

Housing is a significant concern, and the local government in the U.S. have a responsibility to provide proper accommodation for their citizen. In ensuring this, the government has come up with different policies that help in the provision of the basic need for housing at affordable rates. One of the social policies enacted by the federal government is the Affordable Housing Act (Kalugina, 2016). Affordable housing act is in the constitution, and it comes with tools in mitigating housing shortage and affordability. These tools include; inclusionary zoning ordinances, subsidies, and rent control (Lindstrom, 2019). However, economists argue differently, saying the only to mitigate affordability problem is to increase the supply of houses by restructuring the zoning rules making it pave the way for new constructions.

Demographics

Figure. 1: Demand and Supply Curves in the Real Estate Industry

Changes in the factors that influence the demand and supply will cause a significant move along the curves. For example, if the income of people of Atlanta increases, the demand for housing increase while the supply is low. Consequently, the cost of housing will increase, which will cause movement along the demand curve.

We analyze the county of Atlanta, which has experienced massive growth of its population in the twentieth century. With the surging numbers, the demand for housing becomes a priority for this population. Those that do not get accommodation within the metropolitan relocates to other areas where they can get some (Lindstrom, 2019). The movement as a result of relocation has its adverse effects, like the case of Atlanta, relocation triggered redevelopment projects in the new areas of occupancy with the most significant project being the Atlanta BeltLine. The project eyed at giving solutions to various Atlanta problems like traffic congestion, housing, and many more. People have relocated from the Atlanta Metropolitan Area to Atlanta BeltLine. Movement as a result of continuous surging numbers in the metropolitan area increases the demand for housing in the urban. The law of demand dictates that when the demand for a commodity is high, and the supply is low, the price of the product rises (Lindstrom, 2019). Therefore it means that the cost of housing in highly populous areas with few housing spaces in this case Atlanta Metropolitan area is likely to be high. The law of demand instigates relocation of people to regions with affordable housing solutions where the prices are affordable.

Location

The American policy on zoning has a vital role in affordability, according to the national low-income housing coalition, an individual working forty hours a week can afford a two-bedroom house as per the government standards. But this situation varies according to the location where one is or the state. For instance, the rent payable at California is very high though the jobs are lucrative there. As per the standards of that county, no low-income earner can afford a house or a stay there. So the location limits the acquisition of housing. The zoning is very restrictive on the kind of structure to be built in an area, the type of people to leave in which kind of o place. These prejudices, some of which are based on racial profiling, have adverse effects on the economy as it limits economic growth in some areas. The rate of inequality can be witnessed as some people are given preference in the kind of mortgage rates they are given.

Reflection on the Economy

The Impact Regional Economies Have on the Federal Economy

The housing market and the real estate industry plays a vital role in the U.S. economy, nearly 65% of households in the U.S. are owner-occupied, and this is an essential source of wealth (Stupak, 2019).  Additionally, the housing industry has created employment, some people as contractors, painter and many more, which gives a boost to the economy. Comprehensively the housing market accounts for a significant part of all economic activity, and any fluctuations in the housing market can have severe effects on the economy. Housing contributes to the national GDP, as of 2018, spending at residential fixed investment was at $785 billion (Stupak, 2019).

The local economy has adverse effects on the national economy as it ensures maximum employment, which in term maximizes income or output to the federal government through payment of taxes. The American economy is a mixed economy with mixed market forces that is the demand and supply with the government as the regulatory body. The regional economies contribute to the national GDP, and thus the measure of the monetary value of finished goods and services produced in a given country. The local economies offer financial markets in the U.S. In these markets. People can invest in them by buying shares from companies and later selling at a profitable price, and the conventional financial market in the U.S. is the wall street of New York.

Housing’s Contribution to Gross Domestic Product

The total combination of housing’s GDP input is estimated at 15- 18% and this happens in two means that is the residential investment and residential service consumption and spending. Residential investment contributes an average of 3.5%, and this includes; new construction of houses, production of manufactured homes brokers fee and residential remodelling. The rest of the remaining percentage is contributed by consumption spending on residential services estimated at 12%-13%, and they include utility bills and gross rents (www.nahb.org, 2020)

Comparison to International Markets

The U.S. economy is the world’s largest in terms of GDP, and any impact on its economy can be felt in the global market. Consequently, the housing market of the U.S. is also subject to scrutiny. The main fear is in economic depression like the one experienced in 2007 that shook the world market. (Stapleton et al. 2017). Often an estimation of a policy effect on housing can prove some difficulties because of the variations involved in these countries, especially the tax laws (nahbclassic.org, 2020). These inconsistencies included are making the inter-country comparisons difficult hence no informative conclusions. However, there is a publication by the European Central Bank that is available and can be used in these comparisons; it has information on mortgages, housing-related tax policies and financial deregulation. When we compare the housing characteristics in the U.S. to those E.U. countries, there is an abundant supply of land in the U.S., and its population density is lower compared to those of E.U. countries. The U.S. has the second-highest GDP per capita in contrast to the E.U. countries and the third lowest number of persons per room.  Factors that have a direct impact on homeownership include; income, mortgage interest deduction and other tax incentives (nahbclassic.org, 2020) and the U.S. has better incentives than many E.U. countries. In general comparison, the U.S. is in a better position compared to the E.U. countries as the tax incentives are likely to spur further development in the housing sector.  The robust US GDP gives the housing market a better positioning in the competitive market with other countries as the purchasing power is much higher, thus better performance in the global market.

Methods Utilized in the Home Buying Process

The process of home buying has been strenuous in the past. However, with the advancement of technology, companies like Zillow and Redfin are focused on making this activity a one time and easy process. Zillow, for instance, buys the property and resales it to a client. This is advantageous in the sense that all the details are processed, and the client just needs to book an appointment for viewing, which saves time on the processing of transactions. The apps are efficient as they rule out brokers, hence reducing the number of conflicts during the home buying process.

Conclusion

The housing economy is directly affected by affordability, demographics, location, reflection on the economy, comparison to international markets, and methods utilized in the home buying process. With the decline in the rates of unemployment, the housing industry is undoubtedly headed for promising days. This is also associated with the demand for housing, which is already set in motion by the potential homebuyers.

References

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