America’s housing market: increased demand but no response from supply

The housing market in the US has had a strong rebound since the financial crisis of 2008. After house prices plummeted just over 10 years ago, the last decade has seen a strong and steady rise in value across the country. This nationwide trend has been particularly strong in the state of Nevada. Since 2015, house prices have increased by 10% each year, and in 2019, 98% of all houses were occupied.

With housing costs on the up, and extremely high rates of occupation, this would usually be a signal to housebuilders that there is more demand to be met, and thus they would build more houses. Strangely though, housebuilding at the end of last year was 40% lower than pre-financial crisis levels.

It would seem that the current supply of housing in the US is increasingly inelastic. This meaning that the supply of housing is not as responsive to an increase in price as many would have thought. After all, we would expect for housebuilders to be jumping at the opportunity to take advantage of the high cost of housing, for both purchases and rent.

The inelastic supply of housing in the US has been attributed to a number of reasons.

Firstly, the construction of houses has become more expensive, and as costs rise the attractiveness of the investment gets weaker. These increased costs have come in part from the rise in labour costs due to higher wages and the reduction of migrant workers from Latin America. In addition, President Trump’s war on international trade has resulted in tariffs being placed on the importation of various building materials, pushing up costs faster than the gains from increasing housing prices.

Secondly, the housing market has become more regulated in recent years, making it more difficult for housebuilders to get permission. The extra work required is enough to put off many, therefore resulting in a weakened response from the supply-side.

The third and final reason can be linked to the market structure for housebuilding. In the last few years, the market has become increasingly less competitive, with a few large housebuilders now dominating the market. According to our beloved economics, the theory does not favour this make-up. Instead, what usually happens, and seems to be happening here, is that prices get pushed up and output gets reduced, with the few large firms looking to maximise profits and maintain their firm grip on the market.

Now throw the coronavirus into the mix and it is hard to predict how the American housing market is going to play out. On the one hand, construction is surely to remain subdued for a long time, but on the other hand it could be demand which gets hit the hardest. As millions of people now find themselves without income, renters may be forced to vacate properties and the demand for any new housing is likely to plummet. This could put downward pressure on prices and perhaps restore some balance.

But then again, who knows. In these times, who really knows anything anymore?

THINK LIKE AN ECONOMIST!

Q1. What is meant by an ‘inelastic supply of housing’.

Q2. Draw a diagram to show the market for housing in the US. Label the equilibrium quantity and price of housing.

Q3. Analyse the reasons why the supply of housing is inelastic.

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TheCuriousEconomist

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