An explanation of the correlation between the movements along the supply and demand model and the recent steep rise in housing market prices please? My brain refuses to grasp the concept.
In: Economics
ELI5: I’m going to assume you’re talking about a shortage in the housing market. In the supply and demand model, this means the supply curve shifts to the left, as there are less houses overall. This means that the point where the supply and demand curves now meet is at a higher price, but also at a lower quantity
Manufacturing companies shut down or significantly lost production due to maintaining safe working environments.
Offices and office buildings directed resources to allow more personnel to work from home to maintain proper social distancing and keeping productivity up. And also cut employees down to cut costs
People living in crowded apartments in cities no longer have a need to pay outrageous prices to maintain close proximity to their place of work
This allowed a large amount of people in cities and even smaller towns to move into places further spread out in a very short amount of time the demand for homes increased, both previously built homes and new construction demands.
The need for new construction of homes increased demand for building supplies, but reserves ran out quickly because manufacturing businesses are not operating at full capacity.
This creates a bigger demand for building materials and houses so naturally the more desperate or more wealthy pay more for the materials and now these manufacturers are playing catch up. Yet the demand is still high.
As you can see it created a ripple effect.
Keep in mind these are not the sole events that took place. There are so many more factors at work to cause housing market demands to rise. And building material shortages but these are factors
There are more buyers than usual, at same time fewer sellers than usual.
Due to COVID, people were at home more, needed space to work, for kids to do school, wanted a yard for personal outdoor space, etc. many apartment dwellers decided it was time to buy a house. Many starter home families decided it was time to upgrade to a larger home. People already planning to make such leaps were already in the market. Others who’s maybe planned to do so in a year or two moved their purchase forward. And some may have even decided to make new lifestyle plans as a result of COVID, ie. relocate to new area given permanent work from home, give up urban living for suburbs, buy a second house in a vacation place.
Also fueling demand is low interest rates. A $400k mortgage at 5% costs same monthly as a $500k mortgage at 3%. Low rates make buying affordable to more potential buyers and increase buyers’ budgets, which also increases demand at each price point.
At same time, there are fewer houses on the market compared to usual. As people move up the housing ladder, there needs to be a supply at each level. But baby boomers looking to downsize stopped selling. They didn’t want strangers coming into their homes. They didn’t want to travel to look at retirement homes in Florida or Arizona. Their adult kids who lived alone in apartments decided to come back home to ride out pandemic. So they stayed put. Which meant lack of family homes for sale. And when buyers of larger homes can’t find what they want, then they don’t sell their starter home, limiting inventory of starter homes.
So you have, say, twice as many people as typical looking to buy at any given time while inventory of homes for sale is at record lows, affect supply-demand curve on both fronts.
Latest Answers