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The housing industry in past several years has proven to be one of great ups and recently of great downs. With the reduction of interest rates in hopes of stimulating the economy the market was opened to people that were previously unable to obtain a loan for a home or at the least a low enough interest rate on a loan. Many people took advantages of these new low interest loans and even the option-arms loans. For several years the housing industry was booming and many people made money in the market.
Interest rates then began to rise and the problems started. With so many people buying more house than they could actually afford because of the little or no qualifying factors when apply for the loan. The option-arms loans also started to mature and the interest rate on that once low interest loan now went up drastically. This started to saturate the market with foreclosure and bankruptcy.
The supply of loans during the early part of this phase was great. People were finding that with these new loans they could build the house they wanted if it was not available. Thus the demand for new construction increased. This also created a large supply of available homes on the market which were selling in days because the demand was so great.
As time went by though, the interest rates started to become a problem for the market as they rose. This is when the supply of houses stayed the same but the supply of loans began to taper off. Many forecasters are predicting that the prices of houses will fall due to the new lending laws (Economist.com, 2007). For now they have not dropped keeping the price elasticity of demand inelastic. If the predictions are correct and the value of property drops then it may be considered elastic.
When the housing boom began many new developments went up. The construction industry was at one of its highest points. With all of the new builds and development comes down falls. Negative externalities...