home prices on the rise

pearl_1 x

home prices on the rise

Home Prices on the Rise

The article talks about how starting this March housing market has made great improvements by having most major cities in the US raise its prices since August last year. In fact the Standard & Poor’s (S&P)/Case-Shiller home price index, which are the leading measures for the US residential housing market, showed that prices rose in 12 of the cities it tracks. However, smaller cities still is suffering the affects of the housing bubble burst and even reached its lowest S&P level since the bubble burst, but its price decrease rate slowed a lot improving the market.

This shift in economy is due to reasons discussed below.

First, long-term mortgage rates fell to its lowest point since it’s been enforced in 1950s. This decrease would give a great positive incentive increasing the demand for housing (shift right). Where demand law dictates that as the price goes up quantity demand decreases. Moreover, builders are more tempted to invest in housing again creating more jobs shifting the demand curve even further to the right. However, many people are having trouble with them being unable to afford the down payment or banks refusing to grant them a loan. That could slow the demand increase, counter the affect mentioned above leading to steady demand curve or even decrease the demand lowering the prices. Based on the article that is being discussed it is hard to tell which is the case. However, selling houses is not a one-day thing. It takes weeks to finalize a sale creating a doubt in the owners mind about prices being unstable and the very possible outcome of price falling. This could easily decrease the supply, which is described by the supply law that dictates that as the price goes up so are the quantity supplied, causing higher prices. Supply law dictates that as the price goes up so are the quantity. However, since this is a simultaneous shift in both demand and supply curves it is hard to tell what is happening to quantity. Furthermore, one would expect quantity to increase since one of the reasons of increasing demand is builders are having more opportunities indicating an increase in quantities given houses is not being destroyed or converted for different function. In fact unemployment dropped 1% in April to 8.1%.

However, this unemployment actually brings up another interesting point about the production possibility frontier. After the depression happened in the US the economic system starts being inefficient due to either by unemployment or allocating workers outside their fields creating higher opportunity cost for the society to produce other products. This answers two of the three fundamental economic questions that are output mix and resource allocation question.