South-Western College Publishing - Economics  
Sometimes A Higher Price is Better for Sales
Topic Supply and Demand
Key Words housing, affluence, incomes, price
Full Article

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Reference ID: A166257527

News Story While much of the country is seeing housing values fall from their recent peaks, the wealthy population is enjoying a very different dynamic: the value of their homes is rising.

It turns out that not all housing markets are created equally. Houses on the low end and in the middle range are seeing their demand fall, and consequently, selling prices are coming down. However, for homes that cost between $1.2 million and $2.5 million, the market value continues to rise. However, at the top end – the market for the super-wealthy, with homes that cost in excess of $2.5 million, the housing market is not going quite as well. But it’s still better than the market for homes that are more reasonably priced.

Why is the housing market acting like this? There are several reasons why. First, investment income is particularly strong for those with enough wealth to have it. Consequently, they’re still purchasing homes. Those living paycheck to paycheck are not seeing the same income gains, and therefore are less likely to be in the market. Second, foreign home purchasers are coming to the US, buoyed by a weaker US currency; homes here may be considered cheaper than in Australia or parts of Europe. Finally, while mortgage interest rates have been increasing, those increases tend to hurt those with lower incomes.

Will it always be this way? No. All assets have a price, and that asset can always be over-priced. But at this point, uber-expensive houses have not reached that tipping point as yet.

Questions
Discussion Questions:
1. Assuming that income is a determinant of housing demand, and that housing is a normal good, what can you conclude about income gains from this article?
2. What is the value of separating the market for homes like this article has done? Shouldn’t there be just one market for housing?
3. Why do you think that sales of homes in excess of $2.5 million would be doing worse than sales of homes for less than $2.5 million?
Multiple Choice/True False Questions:
1. According to the article, why are sales of expensive homes increasing relative to more economical homes?
  1. Increasing mortgage interest doesn’t affect those with high incomes as much.
  2. Foreign home buyers have been increasing.
  3. Investment income gains have been strong.
  4. All of the above.
2. According to the article summary, it can be inferred that demand for housing that costs less than $1.2 million is
  1. rising
  2. falling
  3. not changing
  4. Cannot determine from the summary.
3. True/False. According to the article summary, incomes of the middle and lower classes are falling.
Source Leonhardt, David. “Can’t Sell Your Home? Maybe It’s Priced Too Low.” The New York Times, July 11, 2007.
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