South-Western College Publishing - Economics  
Rising Tide of Prosperity Lifts Some Boats, Consumes Others
Topic Supply and Demand ; Poverty and Inequality
Key Words rent, income, population, housing, employment, Kansas.
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Reference ID: A153175572

News Story U.S. citizens are paying an increasing percentage of disposable income for shelter (homes) nationwide. Housing prices are rising in Manhattan, San Francisco, and Olathe, Kansas. Olathe, Kansas?? Isn't housing supposed to be cheaper in the Midwest?

Olathe, a suburb of Kansas City, is home to about 120,000 people according to the 2000 Census. And the town is growing. Olathe has grown by 4000 people annually for a number of years, causing its population to triple since 1980. Housing used to be cheap, and the schools are strong there-which is what attracted people to this comfortable suburb. And then businesses came: Honeywell, Sprint and Garmin International all have corporate offices there. New business provided high paying jobs that attracted more workers. At some point, demand for housing and other services outstripped the supply, causing prices in Olathe overall to increase significantly. The average price of housing there has doubled since 2000 to $350,000. Here's the problem: the average income level in Olathe is just under $29,000. Over the 2000-2005 time period, the percentage of people in Olathe paying more than 35% of their disposable income on housing increased from 19% to 42%. In many cases, people pay more than 50% of their incomes for housing.

It's a hidden problem in many respects. Many people in Olathe can purchase a house without a mortgage. Housing built for single family occupation is far more profitable than building more apartment units. As a result, people who can't afford to purchase a house need to rent; but their numbers increase the price of available rental housing as well. The average rent in Olathe is about $700, and some renters are paying over $1,000 a month for a six-room apartment. When people make $8.75 an hour in a service-related position, that rent becomes unapproachable.

Even home builders agree that there is a problem. Some builders lament that they are building houses in Olathe that their own children could not afford. That's when it hits home. The people building the houses can't purchase the houses.

As Olathe continues to grow and attract lower-wage workers for the new employment opportunities that will invariably arrive, the problem will get worse. And many more people will continue to pay more than 50% of their available income on housing. They'd like to be able to pay less, but they can't afford to move. And where would they go?

Questions
Discussion Questions:
1. Does this article indicate a problem about which we should be concerned in the first place? Shouldn't the market take care of everyone who wants housing?
2. What is happening to the level of income inequality in Olathe? Why?
3. Henry Ford was a proponent of what is referred to as efficiency wages, in which individuals are paid a wage above what would be the market equilibrium. Among other things, he wanted to make sure that his employees could actually purchase the cars they were producing. Could the same thing work here? Why or why not?
Multiple Choice/True False Questions:
1. The price of housing in Olathe is increasing because
  1. Demand is rising faster than supply is rising.
  2. Supply is rising faster than demand is rising.
  3. Demand is rising faster than supply is falling.
  4. Demand is falling faster than supply is rising.
2. The rent in Olathe is increasing because
  1. Home ownership and home rental are complements.
  2. Home ownership and home rental are substitutes.
  3. Home rental is an inferior good.
  4. Home rental is elastic.
3. Based on the information in the summary, it can be said that the supply of available housing
  1. Becomes more elastic with increases in income
  2. Becomes less elastic with increases in income
  3. Does not change elasticity with increases in income
  4. Is perfectly inelastic.
Source Saulny, Susan. "Rent's Bite Is Big in Kansas, Too." The New York Times. October 23, 2006.
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