Economics Is the Study of Essay

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If there is a risk that one of the family members will lose his or her job, that will add risk to the purchase decision. The riskier the purchase decision, the lower the price will need to be in order to compensate for that. Another factor here is the expected change in housing prices or interest rates. Buyers are inclined to enter the market if they believe that the cost of home ownership will be higher next year, but they may delay purchases if they believe that costs will be lower next year.

With new home sales last summer, the dip could be in part due to worries about a double-dip recession. The summer was characterized by an inane fight over the debt ceiling, something that shattered confidence of many in the political system, and some of the key actors within that system. A fractured political system is one that is less likely to spur economic growth, so there was cause for pessimism, and that pessimism could well have driven people out of the housing market. The threat of further rounds of layoffs in corporate America, and the realization that interest rates are not going to increase any time soon could easily suppress demand.

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In addition, if the conditions of economic recovery are tenuous but housing prices increase significantly in a short period of time, that could also impact negatively on purchase decisions. The reason for this would be that the utility of home ownership may have increased only slightly in comparison with the cost of home ownership, the result being a decline in demand. Additionally, if concerns about the state of the economy or political discourse increase the wariness of banks, they might tighten their credit policies. There might not be any decline in endogenous demand for new housing; the decline might be in the availability of financing, which is a complementary product, but one that is essential to almost all new housing purchases.

In addition, there is a substitute for new housing, and that is the secondary market for housing. Changes in the conditions of that market can impact on the conditions in the new housing market. Older housing stock might be considered to be better value by those who are currently considering buying a home. Consumers are going to choose the good with the highest utility, and if that is older housing stock, then new housing demand is going to fall as a result.

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