Introduction
According to one famous psychologist, Maslow, humans have needs that should be satisfied in order to achieve contentment. These needs are arranged in a hierarchal order and explained using a triangular model. Occupying the lowest and biggest portion of this model are a person’s biological needs, primarily, food, clothing and shelter. (Simon : 1987) These three are basic necessities and are essential to life. Food is for the inward nourishment while clothing and shelter sustains the outward needs of the physical body.
Among the three, shelter needs thorough planning and careful decisions before acquiring. Nowadays, shelter is not as simple as having a roof and a wall to stay in. People invest so much to having a place that is comfortable and is enough to house a certain number of family members. It could be classified as either owning a house or renting a place (e.g. condominiums and apartments). To some, housing is a valuable asset. Others consider it as a luxury.
Main text
This scenario in the home building industry did not just happen.
It evolved around and within economic boundaries in different countries. The construction business has its ups and downs. It is expected that as human population rise, the demand for housing will also be high. In America, home building hasn’t experienced slow down since the 1990s. As a matter of fact, 17 million conventional houses were built in the span of one year. (Apgar: 2006) However in September 2007, housing construction has hit an all time low profit. (Nutting : 2007)
Some economists say that this is because of recession while others think that customers are practical in spending their money. (Rayne : 2008) According to a study, the reason why there is a scale pattern in the home building is because of greater access to capital and the kind of economic environment that is experienced. Savings and loan industries have developed payment schemes that can help a potential home buyer budget his expenditures. On the other hand, some home builders offer low mortgage interests to houses they sell. (Hogset : 2005) Aside from attracting potential buyers, they also help in choosing the best possible deal to acquiring a property. (Apgar : 2006)
However, there are certain risks that a buyer must put into consideration. If a buyer doesn’t pay the amount due for a certain period, the home builder might cancel the agreement and reacquire the property which the buyer
has started to invest. Some people do not want to take this risk and therefore resort to renting an apartment or a condominium or a house owned by other individuals. (Baker : 2002) Because of the changing market conditions, home builders continue on a virtuous cycle of consolidating and adapting schemes to improve the houses they would sell so that they could attract more people to owning a home than renting a place. (Apgar : 2006)
If the demand for housing is high, is supply enough? How will it affect the price? The price elasticity of supply depends upon the location of the house. (Baker : 2002) If the demand is strong but there are a few available spaces to build houses because of environmental constrains or residential opportunities are limited, then house price appreciation is high. (Apgar : 2006) For example, in a metropolitan area like Los Angeles, main business transactions and thoroughfares take place.
People would most likely come to close to the city as possible. Acquiring a land to build a house would be very difficult since competition is high. The demand for houses is greater than the number that could be added because of less space. Houses would tend to increase costs. Thus, in order to adjust to this situation, people opt to rent in high rise buildings just so they could live near where they work. Rented places maneuver the housing industry in the metropolis.
However, in some cities like Colorado, home supply is slowly exceeding the demand because of low levels of job creation and an increase in unemployment rate. (Covert : 2008) On the other hand, if land is accessible and home builders face little or no construction barriers, house prices are low (Apgar : 2006) and elastic, meaning, the supply can easily “answer” the demands with lower costs. (Baker : 2002) This is particularly true in rural areas where businesses are few and economy is not as active compared to the metropolitan areas. There is a greater chance that an individual, couple or a family could own a house at a lower cost in rural areas than in the metropolitan areas.
The home building industry is not only concerned with the supply and demand in a certain locality. Some other considerations must also be counted like the capability of individuals to acquire a property. In a research by Brown (2004) house prices rise faster than incomes. As a result, people could not afford to buy houses they would want even with lower mortgage rates. Homebuilders would say that prices of materials for construction are also increasing.
Thus, high house prices are just result of the chain effect of the rise in commodities. It was suggested that affordability be put into consideration so that middle-income wagers can still have a chance of owning their own homes. (Brown : 2004)
Another consideration is the effect of the home building industry on the community. While it is true that it answers the need to secure a shelter for people, it can also create problems such as the urgent needs of land spaces to build the houses.
In the metropolitan areas, land prices continuously grow because of some building constraints. In other suburban or rural places, the government continuously regulates the construction of homes because of environmental concerns (e.g. land conversions). They would also consider the location of the land where houses will be built because natural disasters might take place and would further create problems to the house owners. (Sichelman : 2002).
Another problem is that old houses are harder to sell because of the need for repairs. If unsold for a longer period of time, more repairs should be made and worst, the value would continue to depreciate. (Sichelman : 2002) The community where old dilapidated houses are located would have dilemma if the number continues to rise. People might think that people from these houses tend to move to newer communities as a result of certain negative conditions that exist in their place. The market value of that certain locality would decrease and others will be encouraged to move out.
On the other hand, continuous improvements such as house rehabilitations, fitting and refitting of homes in the inner-city sites create positive externalities. (Crowe : 1996) Newly improved and fully furnished houses seen in communities would entail potential buyers to acquire properties thus increasing the economic activities. In turn, the community in general should provide the right environment to sustain the houses.
This is because the bargaining power of buyers shift from the type of house built to the location and the community where the house will be located. (Porter : 2003) Local housebuilders often base their developments on community concerns while large firm builders depend on marketability of their products. The latter focuses more on the needs of prospective buyers or renters rather than the needs of the existing neighborhood (Crowe :1996) Stiff competitions then arise from these types of home constructors. Either way, the local economy becomes active which in turn makes variables in businesses.
The home building industry does not only provide the basic need for shelter. It also provides employment to people in a certain area. However, the existing pattern in the society is that the more skilled a person is, the greater chance of acquiring a good and stable job in the business. (Hyclak : 2000) Wage variation favors those who are more educated, more experienced and generally more skilled. Aside from the mentioned characteristics, there is also a move to hire people that are technologically equipped since computers and other electronic materials are used especially in home building. As a result, the average skilled worker gets better wages than the average unskilled worker. (Rayne : 2008)
Other economists hypothesize that immigration and outsourcing of workers can also be a factor of wage inequalities.
(Rayne : 2008) For example, if a Mexican comes to Arizona and works, he/she will be paid lower compared to other workers who are living in Arizona. This immigrant will try to work harder even for a lower pay to become a “legal citizen”. The need to become a part of a society forces them to accept jobs that no one else would take. (McCombs and Stauffer : 2007) While large home builders stick to employing skilled workers so as not to sacrifice quality, local home builders tend to take advantage of this situation in order to cut their expenses. However, the government plays an important role in assuring that illegal immigrant be deported or finds ways to keep them working to make wages fair and house prices low. (Rayne:2008)
Homebuilding, just like any other industry, entails certain monetary and fiscal policies imposed by the government. In 2007, housing has shown signs of instability market because house values are decreasing as house prices and interest rates increase. However the monetary policies were able to maintain price pressures and lower the inflation rates. (Hoeing:2007) It is important to note that in order to keep housing industry moving, affordability of houses must be considered.
The government must exhaust their efforts towards making the demands for houses much higher. (Raynes:2008) Government officials must therefore continuously monitor the supply and demand of housing including the overall materials and labor costs. Aside from monetary policies, federal policies also have effects on lowering inflation rates. Federal policy states that the government should maintain an annual budget. (Raynes:2008)
Expenditures should be governed by this budget to reduce debts. This federal budget is also used to pay for social security, housing, education, public assistance and other programs. However, in 2002, consumer spending began to tighten thus affecting the overall federal budget. (Raynes:2008) This “economic slump” caused major setbacks in the home building industry. The government therefore paved the way to lessen the impact by offering tax incentives to first time house buyers. (NAHB,2007)
The growth and downfall of the home building business or industry depends on the kind of environment it belongs. Proper management of resources and wise investment of properties creates ripple of success both for the home builders and the consumers. Maslow did consider shelter as a basic necessity of humans because it forms not just the individual image but the image of the entire community as well. Every American family has the right to own a place they could live in.
However, owning a home is not for free. There are many factors to consider in the home building industry. Practicality plays a major role. Prices of houses depend on the elasticity of supply and demand in a certain place. When land areas are few and the demand is high, house price appreciates. Americans would then consider other options such as renting a place which would be a good budget for their daily income. When this trend continuous to succeed, there will come a time when the housing supply will be greater than the demand affecting the industry either positively or negatively.
Some economists say that economic recession is due to the fact that people spend less than what they usually do in the previous years. One factor is the rise in wage inequality or worst, unemployment. The labor sector tends to hire individuals who are technically skilled in their chosen fields.
Labor costs become high forcing local companies to lay off their employees and eventually close. Some local home builders experience this dilemma so instead of closing, they hire immigrants to work for them with a lower pay. Most would invest in the quality of the construction materials which, on the other hand, is also increasing its prices. Large home builders still maintain their skilled workers with high wages however passing still the burden to the consumers by increasing their house prices.
To lessen setbacks, the government offers help through loan agencies and by forcing home builders to cut down their interest rates. But is it enough? Will the industry be sustained with such practice? Many economists still believe that house building will bounce back to be a competitive market. Through careful planning economists are confident that house prices will fall from 5% to 4% in 2008 (Rayne:2008). The government must strengthen the implementation of the monetary and fiscal policies. Primarily, these two will help regulate house prices and at the same time increase the housing demand.
Summary
The housing market is a gamble. When one does not have resources to invest, one cannot own a house.
However, if resources are high, one can choose the location and type of houses to build. No one else can own that place unless the owner decides to sell it or let other people rent it. The choice is neither with the homebuilders nor the government. Customers still have the last say.
References
Apgar, W. & Baker, K. (2006). Home Building Industry Today. Web.
Baker, D. (2002). The run-up in home prices: A bubble. Challenge 45(6).Web.
Brown, B. (2004). Home prices soar above incomes. USA Today. Web.
Covert, J. (2008). Metrostudy: Home Building Slows as Home Supply Exceeds Demands. Web.
Crowe, David B. (1996) Comment of Langley C. Keyes et.als. “Networks and nonprofits: Opportunities and Challenges in an Era of Federal Devolution. Web.
Hoeing, T. (2007) The National Economy and Monetary Policy in 2007. Web.
Hogsett, D. (2005). Housing Numbers Stay Strong. Web.
Hyclak,T. (2000) Rising Wage Inequality The 1980s Experience in Urban Labor Markets. Web.
Glaeser, E. & Sacerdote, B. (2001) The Social Consequences of Housing. Web.
Rayne, I. (2008). How the Economy is Affected by the Home Building Market. Web.
Sichelman, L. (2002). Study Justifies High Home Prices. Web.