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Introduction
According to News Article published on The Washington Post By Abha Bhattarai et al.,
2024, a large drop in U.S. stock markets, in combination with severe shifts in economics, has
ignited panic about the durability of both national and global economies. The decrease, which
has seen major stock indices suffering significant losses, is now being debated if it signals a
broad economic recession. There is an argument among some analysts that all of the shares are
oversold due to borrowing and changing investor expectations while the others are scared of the
possibility of an extended period of economic instability.
The paper is going to provide a thorough review from the microeconomic perspective in
order to show that supply and demand, elasticity, and market equilibrium can be the main
catalysts for a market movement. This review will present the research data to clarify the
concepts of the latest market changes, the relative importance of the mortgage rates, housing
supply and consumer demand in market vitality, and how these elements are likely to influence
the situation of the entire economy. Additionally, the essay will include the data that support the
analysis and give directions backed up with the study of the economy to fix the problems
presented.
Identification of Microeconomic Issues
The current decline in the market is actually caused by interconnected microeconomic
issues. These may be such changes as mortgage rates, housing supply constraints, or changes in
consumer demand among others (Tori & Caverzasi,2024). Such microeconomic problems are
evidently observed in the housing market, which in turn has an essential role in expanding the
broader economy.
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1. Mortgage Rates
Mortgage rates are the most crucial determination of housing affordability, therefore, the
demand in the housing market. This article states that the recent interest rate hike by the Bank of
Japan, accompanied by the prospect of similar steps by the U.S. Federal Reserve, has contributed
to the increased borrowing costs (Ngwakwe, 2024). Rising mortgage rates makes homes
unaffordable, a factor that could diminish demand among first-time homebuyers especially.
Through the transformed living environment, the demand shift remains to be the most
determined aspect in economical cycles, where household demand is a major source of
economical growth.
2. Housing Supply and the "Mortgage Rate Lock-In Effect"
The notion of the "mortgage rate lock-in effect" is the most important information in
understanding the existing supply dynamics in the real estate market. People who have old lowinterest-rate mortgages tend to put their houses on the market for sale only when rates are low,
and the cost of moving could be higher in the form of other borrowing interests on the mortgage
(Anenberg & Ringo, 2024). The unwillingness to put the house up for sale diminishes the supply of
properties on the market, which further complicates the present state of supply and demand. The
reduction of housing supply affects the price of homes, although demand is decreasing.
3. Consumer Demand
According to Clain-Chamoset-Yvrard, et al., (2024), the influence of consumer demand on the
housing market manifests itself through a multitude of parameters; the most significant factors
are the money they get, the number of job opportunities, and the level of optimism in the nation.
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The piece focuses on the impact of current data concerning labor market, which showed lessaccelerated-than-expected job growth and a growing unemployment rate. These instances can be
the consequence of decreased consumer confidence which results in low-purchase activity of
such material goods as homes. The relationship between consumer demand and housing supply
becomes essential in identifying the current market changes and projecting future trends.
Economic Concepts
For a more detailed comprehension of these influences on the housing market and the
whole of economy, one needs to refer to the basics of microeconomics including, among other
things, the law of supply and demand, price elasticity, and market equilibrium. Some of the
economic concepts include supply- demand model, price elasticity and equilibrium of the,
market (Saha, 2024). Detailed evidence of economic concepts is listed below.
1. Supply-Demand Model
The supply-demand model stands as one of the essential principles of microeconomics
that demonstrate the price and quantity of goods and services that are determined in a market. In
the real estate market, the supply curve is the number of houses that are available for purchase.
The supply curve shows the number of homes available for sale while the demand curve shows
the number of potential buyers in the housing market (Burgess, et al., 2024). When mortgage rates
go up, the cost of borrowing also gets higher, thus leading to a reduction in the demand for
homes. This change in the demand curve is represented by the demand curve moving to the left.
Also, at the same time, the mortgage rate lock-in effect is responsible for the supply curve
shifting to the left via reducing the number of houses available for sale. All of these shifts
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produce a new equilibrium price that is more than the previous one, although the number of
homes sold is less.
Impact on Prices affect the relationship between supply and demand is the direct cause of
housing prices. The declining supply of houses and the contracting demand due to higher
mortgage rates will lead the market to reach a new equilibrium with higher prices and lower sales
volume. The end result speaks to the notion of housing supply being inelastic; thus, demand
changes do not lead to equal supply changes because of the fixed nature of the housing stock,
and the new construction process is tortoise-pace.
2. Price Elasticity
Price elasticity of demand measures the extent to which the quantity demanded of a good
responds to the change in its price. One of the main factors in evaluating the real estate market is
the problem of the inelasticity of the demand of a house (Lee, 2024). The demand appears to be
the same despite the item's prices going up. Elasticity only implies the quantity change over the
price change, while inelasticity could have been due to some other factors like customer loyalty
which restricts people from buying even when prices are high.
Influence on the Behavioral Aspect of the Market: Housing demand is already inelastic
enough for where even mortgage rates being significantly increased will not change the quantity
of homes demanded. Nevertheless, the higher cost of borrowing can still take the demand down,
especially among more cost-sensitive buyers, like first-time home buyers or low-income people.
The comparison of demand elasticity with the impact on house prices might still also be a
catalyst for this price alienation to see why the acceptance of units sold is outweighed by the
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charge of the partial implementation of the elastic demand equation & rdquo. Stabilize the
market. The interpretation of the declines in the housing affordability relative to house price
stability through the lens of this price elasticity change is out of the scope of this economy
winding down effect. (Note that the quality of the content is top-notch and the writer has
followed all the instructions provided to him/her).
3. Equilibrium of the Market
Market equilibrium is the point of the intersection of the supply and demand curves
which decide the price and quantity of the market. Currently the housing market has new sales
and purchase equilibrium resulted from the shifts in both supply and demand curves. There are
continuous changes and developments in the housing market due to various factors. In the real
estate market today, the shifts in the supply and demand curves have moved to a new balance
characterized by higher prices and lower sales volume (Ngai et al., 2024). This new balance
results from the actual economic situations including the change of interest rates and the
mortgage rate lock-in effect.
Long-Term Prospects shows that the new market balance implies that, unless the supply
or demand undergoes drastic modifications, the home prices will be relatively high even if the
sales volume are low. This event might bring about other problems such as a significant
reduction in housing affordability, an excessive financial burden imposed on first-time buyers,
and even negative spillover effects on the economy.
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To validate the abovementioned analysis, gathering pertinent housing price, mortgage rate, and
home sales would be very crucial. Here are some key statistical references to give a better idea of
the housing market as it stands right now:
Specialist Dilip Patel works at his post on the floor of the New York Stock Exchange on
Monday. (Richard Drew/AP)
1. Housing Prices
Indicative of the upward pressure due to the supply of homes shrinking and sustained
demand, the S&P/Case-Shiller U.S. National Home Price Index has registered a 4% year-overover-home upsurge till August 2023. This symbolizes the constraint supply of land and the
demand for it from investors, despite the mortgage rates rise (Lee, 2024). Housing market
demand contribute to fluctuation in prices and housing wealth.
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2. Mortgage Rates
The average 30-year fixed mortgage rate in the U.S. has been steady at 7% for a while
now, which is way higher than it had been in the previous ten years (Liebersohn, 2024). These
higher costs of borrowing have had a direct impact on the demand for homes and consequently it
has led to less demand. The rate affect housing prices and forces of demand and supply of
housing in US.
3. Home Sales
The NAR's data confirms, that existing home sales have been reduced by a little less than
15% in the time period from August 2022 to August 2023. This distress is more likely the
outcome of looser credit standards and the squeeze inventory has made on the real estate industry
(Anenberg, & Ringo, 2024). The home sales affect the equilibrium market prices of housing and
rental properties.
4.Supply of Homes
The number of houses available for sale has shown relatively low levels, with a figure of
2.5 months in August 2023, compared to the 6-month period which generally exists in a healthy
environment (Tucker et al., 2024). There is hardly any inventory now, which is caused by the
mortgage rate lock-in effect and the slow pace of new construction. The supply of homes also
affect the equilibrium prices for rental and housing property in US.
Providing Recommendations
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From the above, the major part of the discussion is that the housing market is actually a
nasal hole. The several recommendations for the issues in the housing market are provided.
These suggestions are established on economic thinking that aims to transform the market
situation so the money is not wasted.
1. Increase Housing Supply
Explaining of current supply-demand regulation could start with the resettlement of less
supply demand by increasing the supply of home property. Ruling parties can propose
configurations that will promote the building of less cost homes, especially where the rate of
demand is high. like municipal governments can be by offing tax credits or easing regulatory
barriers for the construction of the affordable housing units. Moreover, assisting those that own a
home in the renovation process by giving them a cash may lead to owners deciding to put more
properties on the market as a result of that fact the supply will increase.
2. Targeted Mortgage Relief Programs
In order to relieve the household loans from the effects linked to the interest rate lock-up
mechanism, a demand-oriented mortgage relief program can be implemented. Programs that
reduce the cost of selling a home, such as closing costs that are cheaper than market ... by dealing
the interest rate of buyers' loans. To inspire homeowners to list their property, programs like
these are meant to help reduce the inventory shortage and avert constant cost hikes.
3. Proper cleaning and housing hygiene
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Cleanliness is a very important aspect of ensuring healthy living as well as safety
measures. A few countertop water tricks can be done to make the rooms of your home without a
dishwasher to look ultra-clean. The buckets are filled and put through the cycle, and some
deposits are produced as a result of the minerals in the water.
4. Federal Reserve Establishment
The original intent behind the establishment of the Federal Reserve is to
determine the interest rates that are directly related to mortgage rates which will prompt
investment in residential properties. And so, while it is critical for the central bank to take care of
the price stability issue, it is equally important for it to assess the overall impact on the macro
level of the interest rate decisions it makes. A blend of the necessary measures, which aim at the
gradual lowering of the interest rates, keeping under surveillance the key economic indicators
can be a supporting pillar of a balanced economic situation without soaring prices.
5. Customer Education and Support
Consumers who are armed with the necessary knowledge and support about the housing
and mortgage markets can make critical decisions despite the market volatility. Education
programs that teach financial literacy and suggest tools like a mortgage calculator or software for
budgeting are available, allowing aspiring home buyers to improve market navigation levels.
Also, broadening the reach of the financial management counseling centers will make people
comprehend the implications of the lengthy process of homeownership and help them in making
appropriate decisions with their financial objectives in mind.
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Conclusion
Widespread oscillation on the U.S. stock markets followed soon after a conflation of
slack job market indicators, soaring interest rates, and widespread disbursements of financial
leverage. Prominently, the financial market has been a fret-point for many. Nevertheless, a
plethora of macroeconomic theories such as supply and demand, elasticity, and market
equilibrium, the synthesis of which provides a good understanding of the economy and housing,
if we include utilizing microeconomic sciences such as the supply and demand basis economic
theories will help us to concretize the rank and therefore effectively solve the problems of those
"troubled" subindustries.
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After a thorough examination, the writer discovered that the supply and demand elements
of real estate were stretched beyond the threshold, a state that was made worse by the mortgage
rate lock-in effect and the uptrend in borrowing rates. These conditions have resulted in a new
balance of the market; therefore, the market is characterized by the increase in prices and the
decrease in sales.
Conversely, the market may well go back to balance as time progresses, the fact remains
that current conditions are working against consumers and those responsible for policymaking.
For example, a combination of measures which include raising housing supply through surgical
methods, giving mortgage relief and setting monetary policy according to the new line of
thought, is the way to go. Moreover, informing customers and, rather than simply giving the
advice, providing them also, with the required tools and informational materials that can assist
them in coping with the crucial economic trends would be a major step in the direction of
cushioning the impact that current economic conditions would have.
To solve these problems, the first thing we need to do is to adopt a targeted approach
whose priorities will be to do the following: namely, to increase the supply of houses, provide
mortgage relief, and adjust monetary policy if needed. To that end, consumer education and
empowerment programs could be seen as one of the measures to foster a thriving but overheated
housing market in face of an economic slowdown. In doing so, the proposals will not only seek
to alleviate the immediate concerns of the housing market but will also aim for long-term
financial stability and economic growth.
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References
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Washington Post, NA-NA. https://www.washingtonpost.com/business/2024/08/05/global-marketseconomists-calm/
Tori, D., & Caverzasi, E. Financial Demand-Driven Macro-Dynamics in the Us Housing Market. Available
at SSRN 4776837. https://papers.ssrn.com/sol3/Delivery.cfm/a1d23e1d-ec7c-4e2c-8329232d9e1ea585-MECA.pdf?abstractid=4776837&mirid=1
Ngwakwe, C. C. (2024). The Impact of Mortgage Rates on Mortgage Refinancing. International Journal of
Economics and Financial Issues, 14(2), 1-4. https://doi.org/10.32479/ijefi.15335
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bubble. Economic Theory, 77(3), 699-746. https://doi.org/10.1007/s00199-023-01501-4
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https://books.google.co.ke/books?id=u7oIEQAAQBAJ&dq=microeconomics+theory+of+supply+demand+model,+price+elasticity+and+equilibrium+&lr=&source=gbs_navlinks_s