During the period 2006 through 2010, housing production in the United States fell from a rate of over 2.27 million housing starts per year to a rate of under 500,000, a decrease of over 80 percent. At the same time, the number of new households slowed to a trickle. Students without a job moved in with their parents, fewer immigrants came to the United States, and more of those already here went home. If there are fewer households, it is a decline in demand. If fewer new units are built, it is a decline in supply.
a. Draw a standard supply and demand diagram which shows the demand for new housing units that are purchased each month, and the supply of new units built and put on the market each month. Assume that the quantity supplied and quantity demanded are equal at 45,000 units and at a price of $200,000.
b. On the same diagram show a decline in demand. What would happen if this market behaved like most markets?
c. Now suppose that prices did not change immediately. Sellers decided not to adjust price even though demand is below supply. What would happen to the number of homes for sale (the inventory of unsold new homes) if prices stayed the same following the drop in demand?
d. Now supposed that the supply of new homes put on the market dropped, but price still stayed the same at $200,000. Can you tell a story that brings the market back to equilibrium without a drop in price?
e. Go to www.census.gov/newhomesales. Look at the current press release, which contains data for the most recent month and the past year. What trends can you observe?