South-Western College Publishing - Economics  
House Prices Go Through the Roof
Subject Elasticity of supply
Topic Elasticity
Key Words Prices, economy, population, market, inventory, buyers, real estate agents, appraisers
News Story

House prices are rising throughout the U.S. The Tampa Bay area is no exception. The causes are the healthy economy and the growing population. The result is that homes are not on the market for long. The low inventory of homes then causes the price of houses to escalate. Buyers fear that if they do not buy now, they will not get the house they want later.

However, uncertainty surrounds house prices. Real estate agents are finding it difficult to help owners set house prices at the right level. Appraisers are having difficulties assessing whether buyers are paying the market price for houses. Buyers are paying top dollar for houses. There is concern that if the economy turns down, buyers could be left holding property that is worth less than they paid for it.

(Updated June 1, 2000)

Questions
1. a) Do you believe that the elasticity of supply of housing in the Tampa Bay area in the short run is relatively elastic or inelastic?
  b) Why? Refer to the determinants of the elasticity of supply and the news story.
2. Draw a supply and demand diagram of the market for housing in the Tampa Bay area. Make sure the supply curve reflects your conclusions in Question 1. Mark the equilibrium price and quantity.
  a) Which determinants of demand have changed? Refer to the news story.
  b) How has the demand curve changed? Illustrate on your diagram.
  c) Mark the new equilibrium price and output.
3. a) Why has the increase in house prices been so great? Consider the curves on your diagram.
  b) The news story refers to the possibility of house prices falling if the economy turns down. Explain why this would happen.
  c) How could a change in the elasticity of supply have the same effect on house prices? Is such a change likely? Refer to the determinants of the elasticity of supply.
Source Teresa Burney, "Market Madness," St. Petersburg Times, April 22, 2000.

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