The Economics of Housing Prices

The Economics of Housing Prices

July 29, 2005, The Motley Fool via NPR

7 Minutes, 17 seconds

Over the last year housing prices have increased more than any time in the last 25 years. Why? Low interest rates have stimulated demand. Also, speculative demand based on the expectation of further price increases has contributed. This trend is likely unsustainable, for several reasons. The ratio of home prices to personal income is rising, which is increasingly making homes unaffordable for families. Similarly, the ratio of rents to home prices is declining making rental housing a more attractive substitute. Finally, lenders don’t appear to believe the bubble is sustainable.

The first minute and a half is a pretty straightforward discussion of a demand increase. I plan to use this when we discuss comparative statics in supply and demand. The next three minutes examines the likelihood of a housing bubble (Yes!). The final three minutes discuss interest only mortgages.

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