As the baseball post season continues, they will once again be playing in “the house that Ruth built.” Yankee Stadium has a great baseball tradition, but in Idaho and the nation we simply built too many houses, and there are few incentives for any more purchases.
Next week brings the 2009 Idaho Conference on Housing, a regular conference sponsored by the Idaho Housing and Finance Association and other groups in the housing industry. On the agenda is a panel discussion of statewide housing conditions. The chief economist for the National Associations of Realtors will speak on housing market conditions and forecasts.
The most recent NAR report on housing prices for the Boise-Nampa Metropolitan Statistical Area show current prices 22 percent below 2007 levels. This compares with a national average drop of 20 percent.
The housing market is in these woes for the simple reason that supply exceeds demand. Like any market, the laws of supply and demand apply to houses. The demand side of the housing market is particularly dependent on income levels.
According to the law of demand, as the price of a good falls, the quantity demand (requested for purchase) rises. With the large drop we have seen in housing prices these past couple of years, you would think more houses would be bought and sold.
But many other determinants of demand — the total amount consumers want to buy at any price level — must be considered. Two important factors beyond the price of a good are income levels and expectations.
Both current income levels and expectations for future growth are way down.
Economists use a measure called income elasticity to predict the rise or fall in the demand for a product for any given change in income levels. The income elasticity of demand for housing tells us how much the quantity demanded for home purchases responds to changes in consumers’ income. Compared with many other goods, housing is highly income elastic.
In a 2006 study from the Joint Center for Housing Studies at Harvard University, income elasticity for housing in Western cities and suburbs was measured at 2; meaning a 10 percent drop in income for an area like Boise can lead to a 20 percent drop in demand for housing, just as we have seen since 2007.
While demand fell dramatically in Idaho, supply remained high. According to data from the Idaho Department of Finance, the Idaho housing stock increased 13.5 percent from 2004 to 2008. Idaho’s population increased only 9 percent over the same period.
In effort to spur residential housing demand, two U.S. senators announced this week new legislation that would extended the $8,000 federal tax credit for first-time home buyers passed earlier this year along with other economic stimulus plans. The new legislation would also raise the income limit to qualify from the current $150,000 for a married couple to $300,000.
It’s hard to think of many households earning $300,000 a year that don’t already own a home, but regardless, high unemployment and an economy in recession mean demand for homes just isn’t there. Tax incentives for first-time buyers do little to affect the income factor of demand.
The housing market needs an economic recovery. That happens when businesses start investing more. Incentives for business investment will do more for current consumer income levels and increase expectations for future growth.
Enjoy baseball’s post season in Ruth’s house, but don’t look for more homes in Idaho or the nation anytime soon.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.