Federal Housing Finance Agency House Price Index

According to the Federal Housing Finance Agency house price index, U.S. housing prices declined throughout 2008 and 2009. What are two demand determinants and two supply determinants that might explain the broad decline in house prices that occurred in those years? Is the market currently in equilibrium?

In 2008 there was recession which was caused by the slow raising interest rates. The housing bubble was created in 2004 and 2005 which is when investors took advantage of the low rates and purchased homes to resell them. Others bought homes that they could not afford, which created the phrase irrational exuberance. This phrase was coined by the chairman of the Federal Reserve, Alan Greenspan. Banks became too scared to lend to one another due to the use of risky loans as collateral. This caused the bailout of Bear Sterns, AIG, Fannie Mae, and Washington Mutual. Employment was declining by the end of 2008.

In 2008 and 2009 two demand determinants (income and interest rates) and two supply determinants (construction costs and availability of financing) can explain the broad decline in house prices that occurred in those years.

Demand:

1) Income – those individuals with higher income can move out of their parent’s home and those who rent with roommates can start their own household.

2) Interest rates – this affects the cost of financing which deters the purchasing of homes.

Supply:

1) Construction Costs –the higher the cost the less profits which discourages building of more homes.

2) Availability of financing – the reduction of the availability of financing for new home construction projects reduces the supply of new homes.

Because there has been a growth in current employment and income there is a balance in the current economy. However, we still have a long way to go till we can relax.