Economic analysis of the current residential housing market in Houston - Essay Example

? Economic analysis of the current residential housing market in Houston Introduction Houston real e market has been experiencing drastic shift due to higher demand for residential houses. This in turn has led to an increase in prices of residential houses because there were few suppliers while demand was substantially high. For instance, it was reported that real estate owners received numerous bids from potential buyers prior completion of a house (Bivins, paras1-4). Houston realtor’s housing data indicates that demand for houses increased by 29% as January 2013 representing a sales increase of 4680 units as compared to the previous year. Additionally, the housing prices were ranging from $500,000 on January 2012 to million dollars. For instance, the highest price were recorded on January 2012 was $200296 (Bivins, paras7-8). The data further indicates that prices of single family houses increased by 9.6% between 2012 and 2013. This indicates that there was a 22.45% increase in housing prices this year as compared to the last year. Additionally, the sale of condominiums was reported to be 422 residential units as at February this year while on February last year the sales of condominiums was 313 units. This indicates that there was an increase in demand for condominiums and mansions by 109 units as at February 2013. According to Eaton, Paras 2-4, higher demand for houses caused an increase in demand for mortgages. For example, demand for mortgage loans increased from 11.4% on January 2009 to 18.6% on January 2011.Therefore, study aims to explain three factors that increase or decrease demands for residential housing in Houston as well as those factors that increase or decrease supply of residential housing. In above connection, the study will put forth demand three examples that explain areas where demand or supply based market failure can be anticipated. Additionally, the study will put forth three examples that explain demand or supply based market failures and how the government can address such failures in a free market. Connectively, graphs will utilize to explain the concepts that are going to be discussed. Economic analysis of the current residential housing market in Houston Numerous factors have been attributed to an increases demand for housing in Houston, among those factors includes: change in consumer’s disposable income, change in demographic, availability of substitutes to mention just but a few (Arnold p.65). Changes in consumer’s disposable income may involve increase or a decrease in income. Whereby, an increase income caused an increase in demand for houses in Houston as many consumers could afford to pay for houses despite having a higher price. This in turn caused a movement from point A to point B causing a right ward shift demand curve from D1D1 to D2D2 as indicated in 1.1. Additionally, change in population demographics such; as increase in population, could have contributed to an increase in demand for houses (Gwartney p.61). Whereby, as birth rates increases, demand for houses increase causing a rightward shift in demand curve as indicated in diagram 1.1. In above connection, availability of houses that could have been used as substitute contributed significantly to a high demand of houses in Houston. This means that better houses were readily available and therefore, most people were able to substitute their old houses with a new and better residential house depending on their needs. On the other hand, those factors that decrease demand for housing include: changes in consumers future expectations. Whereby, future anticipations that houses prices might fall in the future they may make consumers postpone their current demand for houses in order to purchases those houses in the future at a lower price (Hall p.60). This in turn leads to a decrease in demand for houses and hence causing a leftward shift in demand curve as indicated in diagram 1.2 at the end of the essay. Additionally, a fall in consumer’s level of income may cause a decrease in demand for residential houses this in turn causes a movement from point B to point A and a shift in demand curve from D2D2 to D1D1 as indicated in diagram 1.2 at the end of the text (Hall p.60). On the contrary, several factors cause an increase or a decrease in supply for residential houses in Houston. Among those factors that could have caused an increase in supply for houses include; improved technology, Government policies, fall in the cost of inputs (Khanal, paras2-4). Technological advancement may have caused an increase in supply of residential houses because technology not only helps to increase efficiency in construction but it also helps to cut down the cost of construction. This encourages suppliers of residential property to construct more houses causing an increase in supply of houses (Khanal, para2). Additionally, government policies such as decrease in taxes and other charges that are directly attributed to houses construction may cause an increase in supply of houses as more suppliers become motivated to construct more houses (Khanal, para2). Connectively, fall in the cost of inputs such cement and other construction materials could have led to increases in supply of houses in Houston. Whereby, increase in supply of houses caused the supply curve to shift towards the right from S1S1 to S2S2 as indicated at the end of the text in diagram 1.3. In above connection, other factors that could have led to a decrease in supply of houses such factors include: lack of adequate factors of production such as labor capital and land (Tucker p.580. Additionally, Change in population demographics such as decrease in population due to decline in birth rates may have causes decrease in supply residential houses. Change in government policies such as increase taxation on residential properties and other conservancies discourage construction of new houses and this could have led to a decrease in house supply. Therefore, decreases in supply of houses causes a leftward shift in supply curve from S2, S2 to S1, S1 as shown in diagram 1.4 (Tucker p.580). Demand based market failure involves a market condition where the quantity of products demanded is less or more than quantity supplied. On the other hand, supply based market failure involves a market condition where the quantity supplied is less or more than the quantity demanded (Wolf p.35). This means that, quantity supplied is not equal to quantity demand. Market based failure may be attributed to both external and internal factors. For example failure of government to provide subsidies in production may cause the quantity demanded to be less than quantity supplied, poor government policies and higher taxation may cause production to decline causing market failures (Messori p.49).The government may address the above problems by enforcing ant-monopoly laws that aims to limit monopoly powers. Additionally, the government may provide subsidies and ensure taxes levied are reduced. The government may also ensure public goods are readily available to everyone in the economy (Tucker p.357). Diagram 1.5 at the end of the texts indicates how market failures may be address in a free market by ensuring that the quantity supplied equals to quantity demanded and hence creating market equilibrium at point E. Adverse selection and moral hazard Adverse selection refers to a situation where the seller of a property has more information concerning the value and quality of a product he/she is selling than the buyer. For instance, the sellers of houses at Houston seemed to have more information the buyers concerning the houses. This means that sellers tend to value the property at a higher price than what buyers perceive. Additionally, adverse selection may make the sellers refuse to sell the property at any price below what they believe is the true value of the property (Laffont, Jean-Jacques and David p.269). On the contrary, moral hazard involves a situation where the buyer has more information than the sellers. This means that buyers may tend to change their behaviors and act in a manner to that may help them to maximize their utility at the expense of the seller. This may cause substantial to the real property sellers (Laffont, Jean-Jacques and David pp.269-270). Negative and positive externalities Negative externalities occur in a situation where buyers or a firm does not have to bare the full cost of decision making. This means that part of cost emanating from decision making by either the buyer or the sellers is incurred by the society. This means that there will be market inefficiencies (Hackett p.74). On the other hand, positive externalities refer to a situation where society derives more benefits fro a decision made by the individual or the company. This means that firm marginal benefits curve tend to be lower than that of the society (Hackett p.74). Below graphs indicates both positive and negative externalities. Negative externalities Positive Externalities p Loss p loss Q Q* Q* Q Author Summary and Conclusion Therefore, based on the above analysis, it can be scrutinized that Houston real estate market has been experiencing a higher demand for residential houses. This further had caused a significant rise in housing prices. For instance, it has been reported that the prices of residential houses ranged from $500,000 to million dollars. Additionally, the study had explained factors such as; consumer’s level of income, availability of substitute and future expectation as a cause of increase or decrease in demand for residential houses. On the other hand, technological advancement cost of inputs and government policies have been put forth as causes of increase or decrease in supply for residential houses. Connectively, the analysis has explained three examples that explain demand or supply based market failures and how the government can address such failures in a free market as discussed. The adverse selection and moral hazards as well as positive and negative externalities have been discussed. Additionally, graphs have been utilized to explain each concept discussed above. Therefore, through proper understanding of all the above factors it can become easier to understand how market forces influence demand, supply and prices of residential houses in Houston. This may help consumers to make rational decisions on how they can meet their utility for residential Houses. Diagram 1.1 Prices of Residential Houses D2 D1 Supply P2 B P1 A D2 D1 Q1 Q2 Quantity Demanded Diagram 1.2 Prices of Residential Houses D1 D2 Supply P2 B P1 A D2 D1 Q1 Q2 Quantity Demanded Diagram 1.3 Prices of Residential houses S2 Demand S1 C P2 P1 D S2 S1 Q1 Q2 Quantity supplied Diagram 1.4 Prices of Residential Houses s1 Demand s2 P1 C P1 D s1 Demand s2 Q1 Q2 Quantity Supplied Diagram 1.5 Prices Demand Supply Equilibrium E Price Supply Demand Equilibrium quantity quantity Author Works Cited Arnold, Roger A. Macroeconomics. Mason, OH: Thomson South-Western, 2007. Print. Bivins.R.The Houston real estate market is in an all-time frenzy: Home sales continue to skyrocket. Culture Map Houston, 20 February 2013.Web.14 April 2013. . Eaton.C.Houston's Biggest Jumbo Mortgage Lenders. Houston’s Business Journal.29 March 2013.Web.14 April 2013. . Gwartney, James D. Macroeconomics: Private and Public Choice. Australia: South-Western Cengage Learning, 2011. Print. Hall, Robert E. Economics: Principles and Applications. Cincinnati: South-Western, 2008. Print. Hackett, Steven C. Environmental and Natural Resources Economics: Theory, Policy, and the Sustainable Society. Armonk, NY: M.E. Sharpe, 2011. Print. Laffont, Jean-Jacques, and David Martimort. The Theory of Incentives: The Principal-Agent Model. Princeton: Princeton University Press, 2001. Internet resource. Khanal .M. Economic: Factors Causing Shift in Supply Curve.10March 2010.Web. 14 April 2013. . Messori, Marcello. Financial Constraints and Markets Failures: The Microfoundations of New Keynesian Macroeconomics. Cheltenham [u.a.: Elgar, 1999. Print. Wolf, Charles. Markets or Governments: Choosing between Imperfect Alternatives. Cambridge, Mass. [u.a.: MIT Press, 1994. Print. Tucker, Irvin B. Microeconomics for Today. Mason, OH: South-Western Cengage Learning, 2010. Print. Read More