Macro-economic determinants of house prices
Prices of housing can be described mostly through fundamental determinants that have an impact on the demand as well as supply. The side of demand is dependent on the ability of the houses to pay for a mortgage or a house. Further, the high costs of constructions results in decrease in construction and therefore, to a lower level of the housing stock. The most common determinant of the prices of house is the macroeconomic determinant like GDP, unemployment as well as disposable income. An increase in the activity of the economy increases the demand for the space and since there cannot be changes in the housing stick in short run, there is an increase in rent which results in higher prices of housing [2]. The persistent of expansion in the per-capita real GDP might result in the perception of higher life-time growth in income along with the willingness of agents for spending a larger share of the personal income being positively linked with a higher chance of probability of a housing boom as well as reversely less growth with a higher chances of a bust. The following paper will analyse the Economics factors that affects house prices in the U.S.
The market of housing is impacted through the economic condition, rates of interest, real income as well as change in the size of population. The factors on the demand side of the house prices will be determined through the supply which is available. With the times of increasing demand as well as limited supply, rising prices of the house will be seen along with the rising rents as well as an increased risk of homelessness.
- Growth of economy- the housing demand is reliable on income. With the higher growth of the economy along with the increasing incomes, individuals will be able to spend more on the houses and it will help in increasing the demand as well as increasing the prices. In fact, the housing demand is generally eminent to be income elastic, increasing income which results in a bigger percentage of the income that is spent on the houses [4]. In the same way, at the time of recession, a decrease in income will mean that individuals will not be able to purchase and the ones who lose their job might stay behind on their payments of mortgage and end up with their home reclaimed.
- Unemployment- Unemployment is linked with the expansion of economy. Whenever there is an increase in unemployment, few individuals will have a potential of affording a house. But even the fear of joblessness might provide discouragement of people from entering into the market of property.
- Rates of interest- the cost of the monthly mortgage is impacted through the rates of interest. A period of high rates of interest will enhance the cost of payments of mortgage and it will lead to less demand for purchasing a house. High rates of interest make renting more eye-catching in comparison to purchasing. The rates of interest have a huge impact if the owners of houses have a large inconsistent mortgage [3]. For instance, in 1990-92, the huge rise in the rates of interest led to a steep fall in the United Stets prices of the house as most of the homeowners were unable to meet the expense of the rise in the rates of interest.
- Consumer confidence- Confidence is the most significant for the determination if individuals want to take up the risk of captivating a mortgage. In specific hope towards the market housing is significant, if individuals fear the prices of house, people will postpone purchasing.
- Availability of mortgage- In the good economic years of 1996-2006, majority of the banks lend mortgages. They permitted individuals to borrow huge multiples of income. Also, the banks needed very less deposits. This easy way of getting a mortgage meant that there is an increase in demand for housing as more individuals are now able to purchase. But, since the credit crunch of the year 2007, the building societies along with the banks had faced difficulties for raising funds for lending on the money markets. Thus, the criteria of lending were tightened demanding a bigger deposit of purchasing a house [5]. This has led to a decrease on the availability of the mortgages as well as decrease in the demand.
- Supply- a supply shortage increases the price. An excess supply is the reason behind the fall of the prices. When there was a collapse in the market of property, the market was left with a primary oversupply. The vacancy rates had reached 15% and supply more than the demand and the decrease in prices. The housing supply is dependent on the present stocks as well as the new houses builds. The supply of the housing is very inelastic because gaining the permission of planning as well as building houses is a process that consumes immense time. Periods of increasing prices of the houses might not result in an equivalent rise in supply, particularly in nations like the U.S. with restricted land for building home.
- Geographical factors- most of the markets of housing are very geographical. For instance, the national house prices might be decreasing but certain regions can still witness increasing price [7]. Certain pleasing areas can resist trends of market as the demand is high and the supply is limited. For instance, the houses close to the good schools or good link of rail might have a good premium to rest of the areas.
The housing bubble of the U.S. was a real estate bubble which affected majority of the states of U.S. It was the impulsion for subprime catastrophe of finance. There was an increase in the prices of the house in the early 2006, which had started to fall in 2006 as well as 2007 and it reached the lowest in the year 2012 [8]. In 2008, the Case-Shiller home price index had reported its biggest decrease of value in the entire history. The crisis of credit which was led from the busting of the housing bubble is a significant cause of the Great collapse in the U.S. High rates of foreclosure in the year 2006-2007 in between the homeowners of the U.S. resulted in a emergency in august 2008 for the subprime, Alt-A, Collateralized debt obligation, hedge fund, mortgage, market of foreign banks as well as hedge funds. In the year 2017, the U.S secretary of the treasury called the bursting housing bubble the most vital risk to the economy [6]. A fall down in the housing bubble of the U.S, has a direct effect on the estimations of the house along with the mortgage markets, builders of home, home supply retail outlets, real estate, Wall Street hedge funds which is held by the huge investors of institutions as well as foreign banks, increasing the threat of a countrywide depression. Concerns of the effect of the collapsing housing as well as credit markets on the largest economy of the U.S caused the President George W. Bush as well as the Chairman of the Federal Reserve Ben Bernanke to make an announcement of a restricted bailout of the housing market of the U.S. for the home owners who were not being able to pay their mortgage debts.
Impact of economic conditions on the housing market
In the year 2022 alone, the government of the nation has allocated around $900 billion to unique loans as well as rescues linked to the housing bubble of the U.S. There was a sharing of this in between the public as well as the private sector. Due to the huge share of the market of Federal National Mortgage Association as well as the Federal Home Loan Mortgage Corporation along with the Federal Housing Administration got a substantial share of the support from government, even though the mortgages were underwritten more conservatively as well as actually gave a better performance than the ones of the public sector [9].
The median and average sales price of new homes sold in the U.S. in between 1963 and 2010.
Even though the identification of an economic bubble is very difficult in hindsight, many cultural as well as economic factors has resulted in several economists to make an argument that there was an existence of a housing bubble in the U.S. . The bubble was identified by the U.S in the year 2002 [10]; thereafter constant caution of its depth as well as nature and the political reason it was being uncared for. The burst of the housing bubble was forecasted through handful of political as well as economic analysts.
House price approval has not been uniform up to such a limit that certain economists have made an argument that U.S was not facing a countrywide housing bubble, but numerous local bubbles. Even after the hugely relaxed standards of lending as well as low rates of interest, many areas of the country witnessed very little appreciation of price in the time of bubble [11]. Among the 20 biggest metropolitan regions which were tracked by the S&P/Case Shiller index, six of them experienced even less than 10% growth of price in inflation adjusted words in 2001-2006. At the same time, seen metropolitan areas appreciated more than 80% [1]. However, there was no manifestation of the housing bubble by themselves in each of these areas at the same time. Constant high rates of appreciation have been maintained by San Diego as well as Los Angeles since the late 1990s, whereas there was no development of the Phoenix and the Las Vegas bubble until 2004 and 2004 respectively [14]. It was in the East Coast, the more occupied region of the nation where the turmoil of the economic real estate was the most horrible. With the deflation of the housing bubbles, some of the metropolitan regions have experienced high foreclosure rates, even though much of the house appreciation was not witnessed in the first place and therefore, did not find to be making a contribution to the national bubble. By the year 2008, there was a decline in the year to date prices in 24 of the 25 U.S metropolitan areas, with southwest as well as California facing the highest price falls [13]. As per the reports, only Milwaukee has experienced an augment in the prices of house after the year 2007.
U.S. housing bubble and its effects
On the basis of the statements of the historic U.S, trends of valuation, in the year 2005 and 2006, market corrections were predicted by many business writers as well as economists which ranged from a few percentage points to 50% of more from the peak values in certain markets and though this cooling has yet not impacted every region of the U.S. , few wanted that it still could and that the corrections can be very nasty as well as severe. The examples of the last cycle shows major fall in real home prices even 50% fall in certain places are completely probable going forward from today or from not-too-distant future [15].
Real Estates signify an important part of the wealth of majority of the people and this particularly true for most of the homeowners in the Unites States. As per the data of the Survey of Consumer Finances by the Federal Reserve, 64.9% of the families of America owned their own primary houses in the year 2019 [16]. The scale as well as size of the market of real estate makes it a very lucrative as well as attractive sector for most of the investors. There are many ways in which demographic shifts can have an impact on the prices of house, Demographics are the data which explains the population composition like age, gender, patterns of migration, race as well as growth in population. Generally these statistics are overlooked but vital factors impacts the way the houses are prices and the types of property that are in demand. Rates of interest also have a significant effect on the markets of houses. if a person is considering to purchase a house with a mortgage , it is good to research the rates of interest with the help of a mortgage calculator. Changes in the rates of interest can greatly impact the potential of a person for building a residential property. The reason behind it is that the lower rates of interest go, the lower the cost to get a mortgage to purchase a home will be, that makes a higher demand for houses, which again pushes up the prices. Another main factor which has an impact in the prices of the house is the aggregate health of the economy [17]. This is commonly calculated through economic indicators like the employment data, GDP, activity of manufacturing, the price of the commodities and some more. It can be said that when an economy is sluggish, the houses are too. Legislation is another key factor which can have a sizable effect in the prices as well as demand of the property. Tax credits, subsidies as well as deductions are certain ways in which government can temporarily increase demand for land for as long as they are in place [19]. Having knowledge of the current incentives of the government can help a person in determining the changes in demand and supply as well as identify potentially false trends.
Conclusions
The above paper discussed the main economic factors which affected the house prices in the U.S. . Price of the Houses signifies an important part of the wealth of majority of the people and this particularly true for most of the homeowners in the Unites States. The market of houses is affected by the state of the economy, rates of interest, real income as well as change in the size of population. The factors of the demand side of the house prices will be determined by the supply which is available. With the times of rising demand along with the limited supply, rising prices of the house will be seen along with the rising rents and an increased risk of homelessness.
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