Question

Demand and Supply

In the early 2000s, the demand for housing increased substantially as low interest rates increased the number of people who could afford homes.

1.What was the likely effect of this on housing prices? Explain and demonstrate graphically.

2.In 2005, mortgage rates began to increase. What was the likely effect of this increase on housing prices? Demonstrate graphically.

3.In a period of increased demand for housing, would you expect housing prices to rise more in Miami suburbs, which had room for expansion and fairly loose laws about subdivisions, or in a city such as San Francisco, which had limited land and tight subdivision restrictions?

Answer 1

1. In the early 2000s, when the interest rates were low and nearly 0% down payment towards mortgage will result in an increase in the demand for homes because other things constant, the quantity demanded rises as price falls, thus there were new buyers entering the market. Consequently the demand curve shifted out to the right as many buyers preferred to buy homes at a lower affordable price. GRAPH 1

2. In 2005, as the house market bubble to start bursting, the demand curve started to shift towards the left. GRAPH 2

3. Housing prices would start to increase in San Francisco due to the limited space and housing. With low demand for houses the price increases. Because Miami have a lot more space for more housing thus are able to fetch higher demand, thus means cheaper prices