Economic analysis of the current residential housing market in Houston
This paper provides an economic analysis of the current market for single family homes in Houston. Over the past few years, the real estate market has been declining in most states where prices of homes have been falling. In addition, the number of home buyers has been falling in most cities over the past few years, even after recovery of the economy from the 2008/2009 global financial crisis. However, in Houston, Texas, the real estate market has experienced a stable growth for the last 21 months (HAR 2013). According to a report by Houston Association of REALTORS®, home buyers ...view middle of the document...
This has led to an influx of people into the city thereby increasing demand for single-family homes. Further, the $8,000 tax credit for first time buyers of homes has led to an increase in the number of people purchasing single-family homes (HAR 2013).
In addition to owners and renters of single-family homes in Houston, other people enjoy decent and safe housing facilities provided by the Houston Housing Authority (HHA). This authority was founded in 1938 and serves more than 60,000 low-income Houstonians, including 17,000 families housed through the Housing Choice Voucher Program and another 5,500 in 25 public housing and tax credit developments around the city (HHA).
FACTORS AFFECTING DEMAND FOR RESIDENTIAL HOUSING
i. Price of houses
Holding other factors constant, the demand for residential housing will be higher when prices of houses are lower. If house prices fall, the demand for houses will increase because consumers’ income can buy a larger number or quantity of a commodity.
If households expect house price to increase in future, the demand for houses will rise. In addition, if shortage of residential houses is expected in future, the demand will be high even if prices remain high. This is because a shortage will lead to increase in house prices.
ii. Interest rates and availability of mortgages
Interest charged by commercial banks on loans and mortgages have a direct effect on the demand for residential housing (Mankiw 234). Most home owners rely on mortgages to finance construction of houses or to purchase houses. High interest rates on mortgages make it expensive to acquire a mortgage in order to purchase a residential house. High interest rates reduce the supply of money in the economy and thereby reduce purchasing power of individual households. When the amount of money circulating is limited, households spend the little they have on necessities such as food and water. They would prefer renting a house than buying or constructing one. During the 2008/ 2009 financial crisis, interest rates were so high hence mortgages become so expensive. This led to the sub-prime lending by commercial banks and other financial institutions thereby leading the housing crisis (Samuelson 314). Very few individuals were constructing new houses or buying homes. The housing market declined as companies dealing in home improvement products such as Home Depot, Inc. made losses.
When mortgages are readily available, the demand for residential housing will be higher. This implies that if many commercial banks and other financial institutions offer a wide range of mortgages, many households would acquire them thereby leading to an increase in their purchasing power. In addition, if commercial banks offering mortgages have favourable conditions attached on those mortgages, demand for housing will be higher. Where unfavourable conditions such as availability of security or collateral are attached on a mortgage, only a few individuals will afford.