Markets and Adjustment: Housing edition
It seems I am something of the regular discussant on the economics of housing issues in Grand Forks and North Dakota. I was a roundtable participant tonight where the topic was affordable housing. There is still no evidence of a market malfunction if you will. One of the issues here is the general perception that markets function in the manner shown in an introductory economics class. Specifically, when we shift supply and demand curves in class or on paper it appears to be an instantaneous adjustment. Essentially we are cutting to the chase.
Markets are moving to that new equilibrium we draw on the board, but it is a slower process than many realize. People need time to process changes in income, people move to new homes in new markets, and so on. All these changes create responses by others in the market, suppliers and demanders, which can create further change. The end result of all these adjustments is arrival at our new equilibrium. But, as I explained tonight, there is another issue.
The comparative statics that we use are a far cry for the dynamic nature of the economy. Shocks to the system (shocks can be positive and negative) can happen one on top of the other. Think of spending time in the water and a wave knocks you down. After that wave the ocean does not stop. There is another wave typically bearing down on you right away. It makes it very difficult to regain your balance, your equilibrium if you will.
While the general discussion has been of the “oil boom” it has been qualitatively similar to repeated shocks, one on top of another. North Dakota’s economy has been searching for equilibrium, whether you are talking gross state product, labor markets, or housing markets, as it happens. The rapid influx of labor generated increased demand for housing, at the same time higher incomes also raised demand for housing. The response by builders was to increase housing construction, but the pace has not been adequate to sate demand. The result is that the price must increase to clear the market.
Over time construction can pick up against demand and will build up pressures to lower prices. The larger point to make here is that this explanation takes on the outcomes in the current North Dakota market and explains them in terms of a functioning market. The mechanisms are not broken, it just takes time to reach equilibrium.
Now the other point to make here is one I’ve made several times but it bears repeating. There are those that will decry these outcomes as unfair, or unjust. That the market outcome is, in some sense, not right. Based on your point of view or how you think about these issues that might be the case, but you have left the realm of economics and markets. Markets are about efficiency, specifically outcomes that maximize consumer and producer surplus combined. There is as little waste as possible in the market outcome.
People are free to apply their personal moral perspectives to these situations of course, but it does not mean there will be a “better” outcome. For example, consider the situation in Minot, ND brought up by one of the audience at the meeting. Subsidies for low income residents in Minot add to the housing price problem. Lower income residents are able to complete effectively with those residents that have higher incomes, but no subsidy. With prices higher due to slower market adjustment it alters the competitive playing field. It also further slows the markets adjustment to equilibrium.