Housing Predicament in the United States is Sending Red Flags

Over the months of July and August, home sales increased, offering hope that the housing market was finally picking up speed. However, at the conclusion of September, statistics showed that demand for pre-owned homes dropped 2.2%, resulting in a mediocre seasonally adjusted annual rate of $5.38 million as opposed to $5.26 million from the year before (Cassidy, 2009). Meanwhile, median sales prices adjusted to $272,100, increasing 5.9% from the previous year, which marks the strongest rate of appreciation since January 2018. After what was initially predicted to be a rebound in the housing market during the third quarter, the tumultuous housing market has hindered consumer confidence in recent months (Bowles & Edwards, 1993).

According to statistics and information collected by Freddie Mac, which is a government-owned corporation that buys mortgages, mortgage-based securities, which are agreements entailing the lending of money at interest for taking ownership of a property, becoming a homeowner is now becoming increasingly more affordable. Mortgage rates were diminishing at the beginning of the year and have since continued their steady decline throughout most of the third and fourth quarter. The declining mortgage rates currently being witnessed are very similar to what spurred the first mortgage crisis, where the declining rates prompted households of lower income to engage in risky investments and spending (Kusisto, 2019). Over the past six months, declining mortgage rates have been ameliorating the odds for aspiring homeowners to purchase real estate. At the end of September, the average interest rate on a 30-year fixed-rate mortgage was 3.64%, down from 4% in April (Kusisto, 2019). This should prompt concern among households and the government specifically in that lower interest. Although the currently prevailing lower mortgage rates make buying a home easier, the phenomenon may take several months to be experienced by households, as finding and buying a home is often a tedious process.

In analyzing the housing market in the United States, the laws of supply and demand operate differently with regards to real estate. Normally, in capitalist economies, the invisible hand sets prices according to the laws of supply and demand. However, in regards to the market for real estate, rising population levels, combined with diminishing land supplies, are causing a shift towards speculative demand instead (Cassidy, 2009). Formally defined, speculative demand is, essentially, the desire to obtain money for purposes other than those necessary for living. It pertains to the demand for commodities or assets that are expected to embody or generate a higher future value. The specific asset is expected to generate an augmented future value, thereby creating surplus value for the holder of the property. Furthermore, with regards to the market for land, the significance of speculative demand is what has caused the evolution of the value and allocation system for land to have evolved so substantially. When the US was first founded following the Unanimous Declaration of the Thirteen United States of America, the land within the US was distributed for close to nothing (Cassidy, 2009). The primary motive was to create effective methods for sustaining life in the new country. In today’s world system, the land is an unequally distributed resource that is in high demand. However, contrary to the guidelines presented by many mainstream economic models and theories, land is an asset that embodies speculative demand, which is essentially the main cause of the financial/housing crisis (Bowles & Edwards, 1993).

Overall, housing prices have long been expensive relative to household incomes. However, during the peak years of the housing bubble, the degree of unaffordability moved to unprecedented extremes (Cassidy, 2009). Nationally, average housing prices rose by about 129% over the decade from 1996-2006. Supporting statistics show that the ratio of median home prices to median household incomes was nearly four to one in 1996 (Kusisto, 2019). Subsequently, during the four-year period between December 1998 and December 2002, housing prices skyrocketed another 70% in San Francisco and Boston, and by roughly 50% in the Los Angeles, Miami, and Washington D.C. areas (Kusisto, 2019). Therefore, if policymakers resist combating the existing complications facing the housing market, another economic recession may be inevitable. The problem resides in the fact that many homeowners may be reluctant to sell their homes due to their inability to afford a substantial upgrade, which, essentially, limiting the supply of available homes in the housing market. Current listings signify housing prices are increasing (Ehrenreich, 2010). This phenomenon is further worsened by the housing bubble, namely in how households are buying more homes specifically for speculative demand purposes. Furthermore, rising population levels are further exacerbating the situation, creating discouraging housing shortages in many desirable neighborhoods (Ehrenreich, 2010).

In an article published by Paul LaMonica of CNN, La Monica reports that the National Association of Homebuilders states that homebuilder sentiment is reaching its highest level since February 2018, and further states that lower mortgage rates and lower unemployment rates are at their lowest in nearly half a century (Paul R. La Monica, 2019). However, it fails to address how the two combined factors symbolize anything relevant or plausible regarding the health of the housing market. Lower mortgage rates can actually promote risky spending, which is, indeed, desired by lenders as they can procure higher profit margins. Specifically, with regards to the housing market, lower rates could case households to try and invest in homes that they may not be able to afford. In regards to the low unemployment levels, although unemployment levels are at record lows, low unemployment does not mean no unemployment (Paul R. La Monica, 2019). There is still unemployment and, as that will always be the case, that will continue to drive wages downward for both blue and white-collar workers. As such, it is inaccurate to use unemployment levels to justify anything about the health of the housing market specifically.

In retrospect of the housing market, government intervention may be the only way to prevent escalating housing prices. The two problems directly related to increases in demand for houses and mortgages are rising population levels and speculative demand. As it would be controversial to adopt child birth controls in the United States, I believe that limiting the number of homes a household can possess is the best way forward for solving increasingly prevalent housing shortages. In addition government policy makers can enforce price ceilings on mortgage payment levels and home prices to ensure that housing remains affordable. Otherwise, the diminishing supply of houses amidst a rising US population can prevent home seekers from affording an adequate house and, worse, spur another economic recession by virtue of risky borrowing that some households may be forced to engage in to secure a home for their families.

Works Cited

Bowles, S., & Edwards, R. (1993). Understanding Capitalism: Competition, Command, and Change in the U.S. economy. New York: Harper Collins.

Cassidy, J. (2009). How Markets Fail: The Logic of Economic Calamities. Farrar, Straus and Giroux.

Ehrenreich, B. (2010). Nickel and Dimed. London: Granta.

Kusisto, L. (2019). People Are Staying in Their Homes Longer—a Big Reason for Slower Sales. Retrieved 5 November 2019, from https://www.wsj.com/articles/people-are-staying-in-their-homes-longera-big-reason-for-slower-sales-11572777001

Paul R. La Monica, C. (2019). Will the housing market continue to prop up the US economy?. Retrieved 25 November 2019, from https://edition.cnn.com/2019/10/22/investing/housing-market-economy/index.html