econ2 lecture 2

Which of the following statements best describes the relative elasticity of supply and demand in the housing market in the short run?

A) The demand for housing is highly elastic because people can easily change where they live based on price changes.

B) The demand for housing is relatively inelastic because people need a place to live, regardless of price.

C) The supply of housing is highly elastic because developers can quickly respond to changes in demand by building more homes.

D) The supply of housing is relatively inelastic because building new homes takes time and resources, limiting quick adjustments.

D) The supply of housing is relatively inelastic because building new homes takes time and resources, limiting quick adjustments.

Between 1987 and 2003, the price of homes in Las Vegas doubled and the quantity of home sales increased six-fold. What is the most likely for this change in equilibrium?

A) The demand for homes increased

B) The demand for homes decreased

C) The supply of homes decreased

D) The supply of homes increased

A) The demand for homes increased

In 2006, as housing price growth slowed and sales declined, how did speculators and potential homebuyers’ behaviors affect the housing market’s supply and demand dynamics?

Speculators increased supply by selling off properties, while potential homebuyers decreased demand by postponing purchases, leading to further price declines.

Constraints to buying a home?

-Down-payment

-Interest Rate

-Income Requirements

-Alt-A loans

→ No documents

→ NINJA loans (no income, no job or assets)

What happened between 2003 and 2007?

• Banks could sell MBS to investors → More funds to lend

• No down-payment, low interest rate, limited income requirement?

• Buy a home, wait for the price to increase, sell the home, profit, repeat

• Buying an asset with the purpose of reselling (not using) = speculation

What happened between 2003 and 2007? (CONTINUED)

• Investors piled into MBS

• MBS split into different levels of risk (Collateralized Debt Obligations, CDO)

• Financial firms insured MBS with Credit Default Swaps (CDS = insurance if MBS fails)

→ Possible for pension funds and “safe” investors to join

→ Did not need to own MBS to purchase CDs

• By 2006, price growth muted, sales falling

• Adjustable-Rate Mortgage (ARM) teaser rate ends

What happened AFTER 2007?

• Stagnant home prices + rising ARM

• Many homes owned by those with:

→ Low down-payment/ no equity in home

→ Current home price below principal of the loan

→ Cost of holding home increasing

• Unemployment rising