Obviously prices deflate when there is more supply. But if this economic crisis leads to a lot of foreclosures and people abandoning their own homes and apartments to live with other people to save money (parents, siblings, children, friends, roommates, etc) how does the surplus of housing affect the housing prices, is there a linear type relationship?
For example, for every 1% increase in homes and apartment that are unoccupied, does rent and housing prices drop by 5%? Or are there too many variables.
The housing market is a market in that sellers want to get the highest price possible and buyers want the lowest. When the number of sellers exceeds the number of buyers, buyers have the freedom to look elsewhere if the price is not competitive.
Unlike some commodities, house prices tend to react to market forces quite quickly.
I also think the question is greatly complicated by the emotional complexities around real estate.
Americans are especially invested in the idea of home ownership, which means that these things are especially fraught for us. This argues against linear relationships between economic conditions and housing prices—at least, chez nous.
Also, all bets are off in the current environment. But everyone on this board knew that already.
Both supply and demand in housing tend to be inelastic in the short run, demand because housing is a necessity, and supply because it’s difficult to quickly change the stock of available housing. Inelastic supply can result in sharp price drops.
For an extreme example, look at Detroit.
A major loss of population dropped housing values like a rock. Low rents, low property values. Decay. Many homes were simply destroyed because there was no desire for people to live in them. The current pandemic won’t be that extreme – people left Detroit for other places, but this is happening everywhere – but if enough people lose their homes, get evicted or foreclosed on, and move in with family/friends/roommates, we should see noticeable price decreases.
Note in the wiki, while price is on the vertical axis, it’s the independent variable in those plots. Economists and electrochemists, I love you, but you’re killing me.
And so “price elasticity of demand” is a curve that describes how demand responds if you adjust price. It can also refer to a single point on that curve. What I think we’re being asked about is a shift in that curve. To the . . . left, I think, if I’m doing this right on my head.
Is housing demand inelastic though? A 3 bedroom house can have 1 wage earner and his/her dependents living in it, but technically it can have 5 wage earners and their dependents living in it (this isn’t uncommon in high cost of living cities where multiple people share one home and all work).
So if there are ~130 million households in the US, if people start living together more there should be an oversupply of housing. With the economic collapse I think a lot of people will be moving in with family (parents, grandparents, kids, aunts, uncles, etc), friends or roommates to save money. People will still have shelter but there will be a lot of empty houses and apartments. Then again, people desire privacy and dignity, so they will move out when the opportunity presents itself.
I believe in Detroit, housing prices were down to $25 a square foot not long ago. Thats about 50k for a 2000 sq ft home, which is pretty nice. I doubt it gets that bad
The phenomenon you’re describing in Detroit is not really about the price inelasticity of demand there; it’s a shifting of the demand curve. External events or policies can move the curve without changing elasticity. Classic examples are income, tastes, new or differently priced substitutions, demographic changes, taxes.