Economic Effects of Pandemic Lead Housing Boom in the United States
Written by: Rithwik Mathur
The Covid-19 pandemic has affected economic systems worldwide in ways that couldn’t have been imagined. In more specificity, there has been a massive change in the real estate market this year. This “housing boom” brings up many concerns but at the same time has some positives to it. Economists around the country have all sorts of predictions of the real estate market in the months and years to come, however, this is what we know about this housing boom and how it has impacted the United States economy as of now.
A housing boom is when the prices of houses rise very quickly. This typically happens when there is an imbalance in supply and demand. There is too much money in the market and not enough properties. To simply put it the demand outweighs the supply and there is a scarcity in the market. By no means is this a small increase in prices, a housing boom is a VERY significant change in prices.
As you can see based on the graph (Forbes) above, there have been significant changes in the housing market in the past 20 years. The current housing market is experiencing the same boom that was experienced in the early 2000’s. In reality, the current boom has been happening since 2014, however, it has a greater impact and significance amongst the population right now.
Homebuyers are having to pay great amounts of money for properties due to this boom. Priorities of the population have changed tremendously in the past few months. Due to the pandemic people are in desperate need of more space. Additional space has become top priority. This demand is at the moment nearly inelastic. There are not as many options for families trying to find more space and they are forced to pay prices that are much higher than what they were at the end of 2019.
There are both pros and cons to this boom. Higher house prices typically encourage consumer spending and lead to higher economic growth. This is caused by something known as the “wealth effect”. Which is a behavioral economic theory which says that people spend more as the value of what they are buying increases. Due to the pandemic houses and space is more valuable, thus, more spending. On the other hand, these same rising prices reduce effective living standards for those that don’t have a house which is often younger people.
Shown above is a prediction by experts from dotloop.com , a real estate agency. Naturally, the question on everyone’s mind is “When will this market crash?” Many experts don’t see this boom crashing anytime soon. The current purchase application data is maintaining itself flat to positive on a monthly basis. This means that prices have gone up or have stayed the same at the least. However, at the same time the pandemic is causing some sellers to take their homes off the market, during this time which has already been characterized as a housing shortage. The future is unknown and can’t be guaranteed in such a time, there could be a recession if demand no longer exists, nonetheless, analysis of the current market suggests that this market won’t crash anytime soon.
Works Cited
Colombo, Jesse. “Why U.S. Housing Bubble 2.0 Is About To Burst.” Forbes, Forbes Magazine, 1 Apr. 2020, www.forbes.com/sites/jessecolombo/2020/03/31/why-us-housing-bubble-20-is-about-to-burst/#624291966b76.
“It's Official: The U.S. Won't See a Housing Bubble Crash Anytime Soon.” HousingWire, 22 July 2020, www.housingwire.com/articles/its-official-the-u-s-wont-see-a-housing-bubble-crash-anytime-soon/.
Pettinger, Tejvan, and Elisa Robinson. “How the Housing Market Affects the Economy.” Economics Help, 12 Dec. 2019, www.economicshelp.org/blog/21636/housing/how-the-housing-market-affects-the-economy/#:~:text=In summary:,can contribute to economic recession).
Staff, ALM. “COVID-19 Creates Housing Boom.” GlobeSt, 7 Aug. 2020, www.globest.com/2020/08/07/covid-19-creates-housing-boom/?slreturn=20200822132350#:~:text=COVID-19 continues to stir,upset the plans of homeowners.&text=“Somewhat counterintuitively, the coronavirus-,real estate brokerage company Redfin.
Tamny, John. “The 2020 Housing Boom Is A Perilous Economic Signal.” Forbes, Forbes Magazine, 19 Sept. 2020, www.forbes.com/sites/johntamny/2020/09/20/the-2020-housing-boom-is-a-perilous-economic-signal/#5c38a9b52952.
Wow, the near inelasticity of the housing market is surprising. I don’t understand why people would need more space for the pandemic, so that was strange to me. However, I have never heard of the “wealth effect” and it seems very interesting. Essentially, people perceive their wealth as being greater because they have to buy a house for a higher price due to the market inelasticity, and in turn consume goods and services as if they had greater wealth (Investopedia). I wonder if there is a point where most markets for expensive purchases that we make like cars, houses, etc were all inelastic, if everyone would succumb to the wealth effect or if it would go away.
ReplyDeleteI'm not sure that this housing boom will crash until our housing priorities change again, which might not be for a long time considering the large shift the Pandemic has caused in how many people choose to work from home. I think that it might take months or even years after the Pandemic before the change in priority towards housing space returns to normal, because while some people prefer to work away from home, a lot of people enjoy the change, and as such, will keep the boom going for years to come.
ReplyDeleteIts kind of interesting to see how much the demand of houses can increase due to people being put out of work. I read something similar to this. It was an article about how people are being evicted at a quicker rate because most of them are being put out of work, while other people are buying thier dream houses and abandoning renovations. It also did talk about how housing raissing prices can help maintain the economy or the stock amrket, so I somewhat heard of the "wealth effect" that was mentioned. It is kind of shocking how inelastic it is becoming, with people needing to buy it while the prices become higher. Anyway, with priorities, I believe that once the pandemic ends in a eyar or so is when the priorities will beign to go back to normal.
ReplyDeleteI think that this housing boom could crash when the housing market becomes more elastic, which could happen if more firms begin building (slightly) cheaper housing in response to the boom, which would be a cheaper substitute. I don't know when that would occur though due to the pandemic. Also, I found the "wealth effect" fascinating, and I wonder why that happens, as you would expect people to buy less when the price goes up.
ReplyDeleteThe “wealth effect” is a very unique way to approach the housing price increase! It seems to be a psychological perspective as well as an economic perspective, and it seems to apply well to houses. The wealth effect is a change in spending that results from a change in perceived wealth. If someone lives in a large house, they may feel like they are a lot more rich than they would be living in a small house, and might therefore buy more than if they lived in a smaller house. That a change in house size would shift the demand curve for a lot of different goods! I had never thought about that before!
ReplyDeleteYou mentioned that the pandemic has influenced the demand for housing, and this makes sense because more people are working at home during the pandemic. Before the pandemic, it might have been perfectly fine to live in a small house because people spent most of their days at work anyway. During the pandemic though, people are spending all day in their houses, and they probably want to invest more in nicer and bigger houses. This increased demand for houses shifts the demand curve to the right, increasing the equilibrium price of houses.
The “wealth effect” is a very unique way to approach the housing price increase! It seems to be a psychological perspective as well as an economic perspective, and it seems to apply well to houses. The wealth effect is a change in spending that results from a change in perceived wealth. If someone lives in a large house, they may feel like they are a lot more rich than they would be living in a small house, and might therefore buy more than if they lived in a smaller house. That a change in house size would shift the demand curve for a lot of different goods! I had never thought about that before!
ReplyDeleteYou mentioned that the pandemic has influenced the demand for housing, and this makes sense because more people are working at home during the pandemic. Before the pandemic, it might have been perfectly fine to live in a small house because people spent most of their days at work anyway. During the pandemic though, people are spending all day in their houses, and they probably want to invest more in nicer and bigger houses. This increased demand for houses shifts the demand curve to the right, increasing the equilibrium price of houses.
I agree with Jack, I wonder if the housing boom will eventually lead to some sort of crash. What I found interesting was the "wealth effect", I thought that the opposite would happen, but I suppose if increased price signifies increased values, consumers could be persuaded to splurge. This reminds me of the Kohl's article where they marked things for discount even though they were never for sale at the original price. The reason this worked was because the high price made people think the item was of value, which seems to be similar to the "wealth effect" in the housing market.
ReplyDeleteI never heard of the housing boom until I read this article. I knew that there was an increasing demand for housing, but I didn't know they had a specific term for it. It is cool to also see the "wealth effect" and how that effects people. I wonder how much people earn from investing in real estate, and how common that is in America.
ReplyDeleteThis housing boom mostly likely won't crash anytime soon due to how much this Pandemic has shifted housing needs. With more and more people working from home, once the pandemic does end, how many of those people would just go back to the office? I'd bet that a majority would actually want to continue working from home. There may be a noticeable dip with some people going back to work, but it's fair to assume that this pandemic has irreversibly impacted the way that people work.
ReplyDeleteThis current housing boom that we're in is so fascinating to me because we can see it's affects all around us. With the idea that the demand for more space is inelastic it's also relative to include the fact that the amount of houses on the market is limited. So while buyers are willing to pay extensively for more space, they have extreme competition to get the homes they want. Even in my neighborhood, houses will be put on the market and sold within a week or two because the demand is so high. Everybody in the comment section is saying that there will be a crash in the housing market as soon as the demand for space changes, but what happens when we start running out of homes to sell. It will force people to start renting again, thus which might also cause the market to start declining. While the demand might still be there, the opportunity cost(buyers time) of building a home or waiting for one to go on the market is just too high.
ReplyDeleteI found the "wealth effect" very interesting. It both makes sense and doesn't make sense as it gives consumers a sense of financial security when their investments have greater value, but also goes against the common trends of consumers buying less of a good when its price is raised.
ReplyDeleteThis shows how inelastic the housing market is right now because of people really wanting more space and prioritizing that over the fact that house costs are going up dramatically these past few years. People may also be following the trend that house value is increasing, so they are hoping to make money off of purchasing a house if it will continue to go up the next few years. Also, because of the fact that so many people are working from home, it shows that homes might be the new office and therefore people will be more likely to buy houses with more rooms. I wonder if the value of homes going up will also cause people of lower income brackets to have to rent since they won't be able to afford housing. So it might simply cause the richer to have more houses while the poorer can't afford to buy?
ReplyDeleteI knew that homes were getting more and more expensive, especially in cities where there is a greater population due to a variety of aspects like weather or opportunity in the case of a city like Los Angeles, housing is in low supply and consumers buy it at that increased price because they want to live there. But, with the pandemic, people have been moving to other places (not just out of California) because if they have to quarantine anyways, they might want to be somewhere else and spend less money. However, if the housing market is just getting to be increasingly more expensive everywhere,they might save now, but it could get more pricey even in a place with less consumers looking to buy homes. Less quantity demanded means more quantity supplied, which makes me wonder if people who are living in places that already have high prices to purchase in the first place, would they give up their homes to move to less populated places if their home was more valuable than when they bought it? With the pandemic and social distancing, people may prefer to live in places where they are able to be outside more, like somewhere in the country without having to stay six feet apart from the copious amounts of people that could around them.
ReplyDeleteThis is a very interesting and well written account on the effects of the pandemic on the housing market. I do think however that the effects on the market are not as great of a boom as stated. Now I do think that there was some effect, but I think that there are always states of rising and decline in every market. There is really no straight line or flat line in this kind of market. As you can see in your graph there was an increase in the housing market and then a sudden decline and then a sudden increase that had happened back in 2014, and is still rising today. The graph also displays a wavy line for the most part, showing how it fluctuates a lot. This does not however mean that I think there were no effects of COVID-19 on the housing market. I think that the effects will come later and we will be able to see a change in the market later down the road. This is a very interesting concept and idea of looking at how COVID-19 could have or has affected many different areas of the economy.
ReplyDeleteDidn't the market technically crash already? Over quarantine no one was out buying many products which did crash the market for the time. As you already explained that housing was more expensive due to lack of housing in the market from covid. The housing should eventually become cheaper when ever covid surpasses.
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