2001-2002 Essay Contest - Is there a housing shortage? What role should government play in the housing market?
Primer on Housing
Housing plays a vital role in people's lives, as everyone needs a roof over his or her head. Questions arise, however, when families have difficulty finding housing they can afford.
Housing has several characteristics that policy-makers consider when addressing the role government should play in the housing market. Housing is durable, that is it can be used several decades, and it is expensive; buyers usually must borrow money in order to purchase a home. Families can choose from many types of housing; options include single-family or duplex houses, apartments and condominiums for sale or rent.
Some experts argue that there is a housing shortage for low-income families, while others claim that such a shortage is overstated. Government housing policies have ranged from building housing units directly (public housing) to providing vouchers for low-income families to pay for housing. Other experts contend that while some policies have boosted housing levels for low-income families, other policies have resulted in costly unintended consequences. They argue that the government should limit its role in the housing market and instead focus on raising the incomes of low-income families.
Issues regarding housing have social, political and economic consequences. In this year's essay contest, students are asked to use their economics eyeglasses to analyze the housing market and determine the appropriate role of government.
This housing primer starts by examining the basic components of the market as well the roles that supply and demand play in determining the price of housing. It then discusses whether there is a housing shortage and the role government has played in the housing market. Use this primer as a springboard for your own research and writing your essay.
The housing market
As with any good, the housing market provides a meeting place for consumers and producers. In the housing market, consumers include families or individuals who rent or own units, while producers include builders, landlords and homeowners.
Now, take a step back and review a few basic principles of economics. Supply is the relationship between prices and the quantities of goods businesses produce. The law of supply says that as price falls, quantity supplied goes down, and as price rises, quantity supplied goes up. Supply is determined by available technology, taxes, subsidies and production costs. Demand is the relationship between prices and the quantity of goods consumers buy. The law of demand says that as price falls, quantity demanded goes up, and as price rises, quantity demanded goes down. Demand is determined by consumer tastes, income, consumer expectations, and the prices of related goods. The equilibrium price lies at the point where quantity supplied equals quantity demanded. Changes in either supply or demand may spur a change in the equilibrium price.
Sub-markets develop within the housing market based on the type of unit and its geographic location. Since some people want to buy penthouses and others shop for studio apartments, multiple demand curves exist. Some construction firms specialize in building single-family homes, while others focus on high-rise developments, resulting in multiple supply curves. Because there is more than one set of supply and demand curves, there are many equilibrium prices, that is, many different rents and home prices. And sub-markets influence one another: Prices and supply of one type of housing can affect the prices and supply of other types of housing.
Studies have also shown that homeownership may not only benefit the household living in the home, it also benefits other people, especially other homeowners nearby. When people own their home, they tend to take better care of it than they would if they were renting from a landlord. A well-maintained home helps keep the market values of surrounding dwellings higher than if the home were poorly maintained.
The question of a housing shortage
Some experts claim that our country is in the midst of a housing shortage. They argue that many low-income families have either no access to housing or must undergo extreme financial burdens to pay rent. Currently, 5.4 million U.S. households pay over 50 percent of their income for housing. Housing is generally considered affordable if it costs no more than 30 percent of the occupant's income.
These experts argue that since there are not enough units available for low-income families to buy or rent, the market has misallocated resources and therefore the government should adopt policies that increase the availability of affordable housing. Other experts contend that there isn't a housing shortage, according to economic theory. They say that the housing market is responding appropriately to supply and demand signals. The lack of affordable housing is the result of low income levels for some families, so the government should focus on raising income levels, not on tinkering with the housing market.
From these various points of view, experts have argued for government involvement in the housing market on the supply-side, such as building affordable units (public housing), to the demand-side, such as providing vouchers or coupons to low-income families to pay for housing, to limiting the role government plays in the housing market. The glossary contains several descriptions of government policies that influence the supply of and demand for housing.
Feel free either to discuss one of the issues mentioned in this primer or to present a concern not listed here. You may also decide to take a local or national perspective in addressing housing issues. While much research has focused on issues in urban areas, smaller cities and rural areas also have unique problems. If there are housing issues in your area that interest you, you might interview staff at an area nonprofit or government housing organization, or contact a local realtor or financial institution. After gathering your research, organize your thoughts and write a creative, three-page essay. We look forward to reading about your views on this issue.
Green, Richard K. and Malpezzi, Stephen. A Primer on U.S. Housing Markets and Housing Policy. Working Paper Series, Center for Urban Land Economics Research. University of Wisconsin, 2000.
O'Sullivan, Arthur. Urban Economics. New York: Irwin McGraw-Hill, 2000.