Approaches to Stimulating the Housing Market
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Approaches to Stimulating the Housing Market

Historically, the volatility and movement within the housing market is well understood, and controlled by a few key factors. We look into common trends and patterns in the marketplace, and draw conclusions about what social aspects incentivize behavior by consumers and producers.

Introduction

The housing market is a complex system. It affects the economy, and thus, the government has a vested interest in understanding it, and controlling it in the best way possible. As a result, there have been a series of attempts to stimulate the market in a variety of ways. But what are these methods? What are they based on? What are their aims? In this paper, I will examine these questions by looking at a few major initiatives to control the housing market.

Methods

To do this, I will look at the causes of The Great Depression, the boom and bust cycle in the US, and the recent housing collapse that occurred in the US, as well as its effects on the economy. Here, I will highlight some of the causes, and the ways in which the government has tried to avert or address these causes directly or indirectly.

Discussion

The Great Depression was a result of a series of events, including a fall in demand for goods, and a rise in the cost of goods. These were due to a variety of factors, including the removal of gold from the system, and the lack of a consistent policy to control the economy. The housing market was not really an item on the agenda. It was a fairly stable market, and the government did not intervene, apart from the occasional attempt to stimulate demand.

However, the government did make an attempt to encourage employment by encouraging people to move from the banks to the housing market. The idea behind this was to boost businesses, and the market in general. These efforts were somewhat effective, and by the end of the decade, the economy had begun to recover. However, the lack of control on the market meant that the recovery was not long-lasting.

The housing market got worse, and this was partly due to the way in which the government intervened in the market. The government provided financial support for the housing market, giving out loans to people looking to buy a house, and in the process, making it easier for people to borrow money. This in turn, drove the prices of houses up, and in the process, further encouraged people to buy houses. The prices continued to rise, and as a result, more people felt that it was a good idea to buy a house. This caused a lot of people to borrow money to buy houses, and as a result, the market became over-saturated. Looking further ahead, more recently, the global financial downturn of 2008 was caused by a number of factors. There was a rise in the rate of inflation, which led to a cut in the rate of interest. Other factors led to a fall in the demand for goods, as people saved on money, and instead, bought more assets. This caused a fall in the housing market, and in the process, led to a number of problems. The housing market collapsed, and this had a number of knock-on effects. People were unable to pay mortgage payments, and as a result, they lost their houses. Some of these people went bankrupt, and in the process, the economy suffered. It is clear that the government has tried a number of methods to control the housing market. Some of these methods were successful, and some were not. The success in this regard was largely due to the fact that the government did not really understand the housing market, and the market in general, but pulled the levers they had hard, while external factors had a much larger effect on the outcome. Ultimately the banks that were "too big to fail", did in fact fail, paid out by the innocent tax-payer. Other crises have occurred around the world since (but primarily due to COVID-19), so it is hard to gather conclusions about how much the world's financial regulatory authorities have learned from the hard lesson of the GFC.

Levers to pull

Despite many attempts, there are few levels to pull that have a large (macro) effect on the economy. These are of course interest rates, and subsidies / releasing land titles. In recent years, novel approaches and attempts have been made to increase the supply of housing, for example, reducing regulation and controls on home builders, with the intended effect being that new types of construction companies (such as construction company franchise businesses) are incentivized to appear, to fill the gaps in the efficient market, created in the vacuum left by reduced regulation. As the years pass, analysis is showing some of these methods are effective with a small magnitude of effect, and others more or less so. More research and meta-analysis is needed.

Consumers

How are consumers socially affected by the changes and initiatives of government bodies and banks? Two main approaches are taken. First, the extent to which consumers feel that it is a good time to buy or sell, and whether they are incentivized to do so. Second, the extent to which consumers are affected by the movement of the market, and whether they are incentivized to try to be on the right side of the market, take risk, and make investments in their long term financial future. Markets vary substantially on a state-by-state level, but on the whole consumer trends are well studied and understood, at least, outside of a global financial downturn.

Conclusion

The authors conclude that there is a clear need for further research and methodology development. This is especially true for the housing market, though we acknowledge that in the current environment of a global pandemic, there are unique and long-lived challenges to conducting a normal market analysis.

Keywords

macroeconomics, housing, housing market, economics, housing bubble, housing market bubble, housing market collapse, housing market crisis, United States housing market, housing policy, national housing policy, home ownership, Federal Housing Administration, Federal Housing Finance Agency, Federal National Mortgage Association, Federal Reserve, Great Depression

References:

(1996). "The Economics of Real Estate Markets", MIT Press.

Author(s): Coco Ming
Published at: 18 Feb 2021 11:26 GMT
Original link (login required): https://ilde.upf.edu/pg/lds/view/211603/