Housing Supply and Demand in Financing - Essay Example

Housing Supply and Demand in Financing: Housing serves as a shelter for all the people and their family, satisfying their main physical need and holding the equipment people need for their daily routines. Although the necessity of having a housing unit is clear, owning a house has become fashionable and is looked upon nowadays as a long-run investment decision which provides stable and rather good return. In this scope, the tenure choice, or the decision whether to own a house or to rent, is a personal choice, which depends on personal financial situation as well as socio-cultural factors as the desire for independence and security connected with owning a house rather than renting (Angotti, 2007). This issue has raised many discussions among scholars on the factors that influence the tenure decision and whether the decision is rational (Angel, Shlomo, and Sopon Pornchokchai, 1998). If to consider housing as an investment, it is necessary to single out the qualities of the investment asset, (Edelmenn, 2000) which any investor will evaluate when making the investment decision. These qualities are the 'divisibility of holdings, security of real capital value and income, volatility of returns, liquidity of capital, the cost of purchase and sale and capital appreciation prospects'1. Thus, the main financial characteristics of an investment are whether the income and capital values are fixed or whether they are variable, and if they are variable, to what is the variation linked (Schon, 1997). Applying these investment characteristics to property, the real estate investment will have the following features. First, heterogeneity implies that in contrast with other financial assets, such as stocks and bonds, which are the same for particular company and particular issue,( Bachelard, 1998) all the housing units are unique and differ in size, location, age, construction, maintenance, tenant, surroundings and other features (Lindgreen, 1994). The fixed location of the property adds another important factor for consideration, as sometimes it will be the determining underlying feature for the value of the property as an investment (Scott, 1999). Supply and demand is an important part of housing finance because supply and demand dictate the overall need of houses overall (Schmidt, 1999). The need of houses therefore dictates price (Bahl, 1999). Examples of this can be seen in today's present economy as well as the economy of six years ago. Six years ago, houses were in high demand, especially in California. Thus, as more and more people obtained work in California and moved to the state, more and more houses were selling. This drove the housing prices up in California because the demand for the houses in California were very high. Since California has always been a wealthy, industry-oriented state with the reputation of generating wealth for others, many individuals began to seek out their own wealth in that state and therefore moved into the state. As more and more individuals pursued this, housing prices soared as high as $750,000 in desirable places like Orange County. Houses in Los Angeles could cost as much as $1,000,000 for a standard three bedroom, two bath family home in a nice area. Financing a home was very easy at this time, as the economy was good and people were able to get and hold jobs. Thus, credit unions were willing to work with customers. All kinds of payment plans were presented (Linn, 1993). These included inflated payment plans, interest only loans, 15 year loans, and 30 year loans. Many individuals were also able to opt for housing loans with balloon payments. At the time, all of this seemed like a great opportunity, but as many people recognize now, part of this willingness to allow so many people into homes eventually hurt the economy. Many individuals were not able to pay for their houses, and this affected the economy overall. However, as the economic recession began to take hold, a change took place with the demand of houses. People began to lose their jobs in California, and industries began to fold. People thus had less and less money to invest, as well as less purpose overall to live in California. Without employment, many individuals were not able to hold onto their high priced houses, and many decided to go back to renting in order to survive. Therefore, many individuals put their houses on the market, and many individuals simply lost their houses. This meant that there were many houses out on the market and available for purchase (Eberstadt, 2005). However, because so many individuals had lost their homes and jobs, many were not looking to purchase a new home. Therefore, houses stayed on the market for a much longer period of time without selling, thus driving demand down. With demand down, housing prices dropped (Schuringa, Salahudin, Meyer, and Yap, 2009) With the economy bad, fewer people are able to get the credit necessary to get a house because the credit companies are not as trusting about individuals keeping their jobs. Credit companies are now hurting themselves from allowing individuals to own homes when their credit was not good or their income did not demonstrate that they could actually afford the home overall. Thus, this created a huge problem, and the credit companies have overcompensated by not allowing as many loans to be approved. It is extremely difficult right now for those even with good credit to get a loan simply because of the economic situation. Therefore, it makes it even more difficult for people to buy houses, and this fact will continue to drive the demand of houses down and hurt the housing market overall, even though individuals do want to buy houses. Housing Need, Social Exclusion, and Politics Housing need plays a very popular part in politics today with the current recession. This is because many individuals have lost their homes due to job loss and the recession. Many individuals have lost their businesses. This means that more and more people need houses but are not able to afford them. Therefore, politics is responding by attempting to find and make more government funded projects in order to assist people and provide them with housing. The goal of this is to make sure individuals are provided for, whether or not they are suffering from the economy. Social exclusion comes into play where this is concerned because many individuals trying to obtain houses have been ignored due to losing their jobs or poor credit. This factor has only served to increase homelessness. Therefore, politics has stepped up to bat within this context as well in order to help these individuals. As more people become homeless due to the recession, more individuals are becoming interested in paying attention to those people politically (Annez, 2004). Homelessness has become a very real political issue of late. Homelessness, like unemployment, is currently on the rise and is demonstrating numbers that are very alarming (Durand-Lasserve, Alain, and Pajoni, 2005). Many individuals are having difficulties making their house payments and the governments are encouraging mortgage companies to work with individuals that are struggling (Scott, 2009). More and more, the government is attempting to get involved with mortgage companies and the housing crisis in order to prevent individuals from losing their homes (Ball, 2004). The general hope is that if more people can stay in their homes, the crisis will eventually pass and people will be able to recover financially. However, whether or not that can honestly happen remains to be seen. Right now, the political focus is on the economy and helping those that are losing their houses and jobs, and efforts to keep people in their homes have been a heavy focus of the new president's politics (Angel, 2008). Angel, Shlomo, and Sopon Pornchokchai. 2008. "The Informal Land Subdivision Market" In The Transformation of Land Supply Systems in Third World Cities, edited by Paul Baross and Jan van der Linden. Aldershot: Avebury, 169-191. Angotti, Thomas. 2007. Housing in Italy: Urban Development and Political Change. New York: Praeger Special Studies. Annez, Philippe, and William Wheaton. 20044. "Economic Development and the Housing Sector: A Cross-National Model." Economic Development and Cultural Change 32 (No. 4): 749-766. Bachelard, Gaston. 1998. La Potique de l'Espace (The Poetics of Space). English ed., 1994. Boston: Beacon Press. Bahl, Roy W. 1999. The Practice of Urban Property Taxation in Less Developed Countries. In The Taxation of Urban Property in less Developed Countries, edited by Roy W. Bahl, Madison: University of Wisconsin press, 9-47. Ball, J. F., and B. E. Havassy. 2004. "A Survey of the Problems and Needs of Homeless Consumers of Acute Psychiatric Services." Hospital and Community Psychiatry 35: 917-921. Durand-Lasserve, Alain, and Raul Pajoni. 20055. Synthesis of Case Studies: A Seminar Introduction. In Integration of Irregular Settlements: Current Questions in Asia and Latin America, edited by Valerie Clerk, Alain Durand-Lasserve, Francisco Luciano, Raul Pajoni , and Laurent Vidal. Paris: Groupment de Reserche Interurba, AITEC. Eberstadt, Nicholas. 2005. The Tyranny of Numbers: Mismeasurement and Misrule. Washington, D.C.: AEI Press. Edelman, Marian Wright. 2000. Portrait of Inequality: Black and White Children in America. Washington, D.C.: Children's Defense Fund. Lindgren, Pia. 1994. Table appendix in Housing in Sweden in an International Perspective, edited by Eva Hedman. Karlsrona: Boverket, 145-151. Linn, Johannes F. 1993. Cities in the Developing World: Policies for Their Equitable and Efficient Growth. New York: Oxford University Press. Schmidt, S. 1999. "Convergence Theory, Labor Movements, and Corporatism: The Case of Housing." Scandinavian Housing and Planning Research 6 (No. 2): 83-101. Schon, Donald A. 1997. Institutional Learning in Shelter and Settlement Policies. In Shelter, Settlement and Development, edited by Lloyd Rodwin. Boston: Allen and Unwin. Schuringa, M., A. K. Salahudin, E. Meyer, and K. S. Yap. 2009. Baldia Evaluation Survey Report: A Study of Improvement of Living Conditions in a Katchi Abadi. Unpublished. Karachi: Karachi Slum Improvement Project. Scott, M. 2009. A New View of Economic Growth. Oxford: Clarendon Press. Read More