Introduction
Housing market refers to a general market which involves purchasing houses while at the same time selling them in the said market. The selling and purchasing of these houses definitely occur between interested and willing buyers and sellers. Such transactions can either be conducted directly or indirectly. If conducted directly, the decision is left for the owners of these houses. On the other hand, if transactions are indirectly conducted, brokers are incorporated in the scenario. It should be understood that the housing market does not boast a physical exchange. However, it boasts of a housing market index that measures its overall performance levels.
Economic model
As an economic practice, the housing market is also affected by laws of demand and supply. As such, normal rules of supply and demand dictate that an increase in price should lead to a significant decrease in the amount of a substance that is being demanded. On the contrary, a decrease in price levels of a commodity should see a registered increase in the quantity of a commodity that is being demanded by consumers (Kash). The housing market does little to escape the above law of demand and supply. When prices of houses increase, demand on these premises significantly decreases. On the other hand, when the prices of these premises decrease, the demand on the same premises is ultimately expected to increase significantly.
Factors affecting housing prices
In recent times, it has become utterly important to analyze all factors that affect house price dynamics. Some of the reasons for such analysis include the role that housing is continually enjoying in an individual portfolio, the percentage of housing in GDP, the proportion of households expenditures in housing, and the increasing issue of mortgage debts. Such mortgage debts have become a major liability of most households and it greatly influences the affordability of houses (Case, Quigley, and Shiller). Overall, housing prices are known to have a great influence on business cycles because they tend to affect the aggregate expenditure, as well as the overall financial system.
Effects of interest rates on housing prices
One of the factors that greatly influence price levels in the housing market is the prevailing rates of interest. It is well known that an increase in the rate of interest bears immeasurable weight on the final price of a commodity. When the rate of interest is high, the prices of housing are increased. This is brought about by the fact that mortgage value also appreciates with the appreciation in the interest rate. Nevertheless, when interest rates are lowered, corresponding prices of houses also go down. This comes as a result of the reduced mortgage value, and as such more and more people can afford the cheaper rates of acquiring a house.
When the Federal Reserve cut its interest rates to 1%, the effect on the housing market was that prices of houses went considerably low. With the decrease in prices, housing demand greatly increased since the law of demand as observed in the above economic model dictates that a decrease in price is met by an increase in demand of the commodity in question. Once the Federal raised the interest rates in 2004, the prices of housing went up. Consequently, the demand for such premises decreased. As a result, the homebuyers’ ability and willingness to borrow was greatly reduced since they could no longer afford expensive mortgages.
Works Cited
Case, Karl E, John M Quigley and Robert J Shiller. Comparing wealth effects : the stock market versus the housing market. London: Cambridge, 2001. Print.
Kash, Rick. The new law of demand and supply. New York: J.A. Gray & Green, printers, 2002. Print.