Construction boom of St. George, Utah

I read an article referencing the the construction boom of St. George, Utah and the later recession, and how home builders are responding to the demand of the current market. The five to seven year period prior to the recession of 2008 was a huge building boom in St. George.  We saw home prices double over the course of these years.  When the recession hit, the demand for new housing literally dropped to a fraction of what it was during the boom.

Looking back from now (2013) we are starting to see home buying on the rise, though not as fast as it was during the boom, as well as interest rates beginning to go up.  Some developments that were left with only streets paved and one or two houses built at the end of 2008, are now seeing plans for ten to twelve houses being built over the next year.  While we do not see the demand of 2005, we can most definitely see elasticity taking effect with more modest prices on new homes as well as builders constructing far less new homes.


Dave Tufte said...

Quinn: could you clean up that link (there are directions on the blogs sidebar)?

I think the bust was a case of demand shifting left. That may have caused some builders to drop out of the market, shifting supply left. Both will reduce Q. The effect on P is ambiguous, but the big drop in P suggests that the demand shift was larger.

But what do you mean by "elasticity taking effect"?

JRich said...

I enjoyed how this post incorporates our local economy. It seems that the elasticity of demand and price of homes in Southern Utah has changed over the past 10 years. Before the economic recession home prices were more inelastic. It seemed that as prices continued to climb the demand for new homes was unaffected. Then around 2008, there was a drastic change as building and buying homes went nearly stagnant. Soon after, the demand and price of homes became much more elastic. Home prices significantly dropped; prices had to drop to sell any homes. I haven't given much thought to changing elasticity. It will be interesting to see what happens in the Southern Utah housing market in the years to come.

Dr. Tufte said...

Quinn and JRich: the topic is fine, but I think this is about shifts and not elasticity.

JRich: we don't usually think of prices as being elastic or inelastic. Typically, this is reserved for quantity. Then we need to figure out if it's demand or supply.

I think what you're saying is that prices weren't very flexible before 2008, and were more flexible after that.

I'm speculating (because I don't know the data very well), but I suspect that demand was very elastic before 2008. This means that if we had (hypothetically) put houses on sale in 2007 that people would have snapped them up quickly. That seems correct to me.

In turn, that means that if supply shifted to the right, that price wouldn't change much, but quantity demanded would increase. This also seems correct.

I also think supply was fairly elastic at that time. If (hypothetically) buyers had shown up with more money to spend, suppliers would have built a lot more houses. I think this is what happened with "California money".

In sum, prior to 2008, both demand and supply were pretty flat. I think what we saw in the Great Recession was primarily shifts of these two curves (as I mentioned in my first comment).

Now, could demand and supply have gotten more inelastic since then?

With demand, inelastic means that people are going to buy a house no matter whether the price is high or low. I don't think this is St. George over the last 5 years, so it seems to me that demand is still elastic.

As to supply, inelastic means that people are going to sell a house no matter whether the price is high or low. And yes, I think that this seems plausible, so my guess is that supply has gotten more inelastic.

Dr. Tufte said...

Quinn: 100/100
JRich: 50/50

(Sorry, I forgot the grades).

MJ said...

Often times when we examine products that have inelastic demand, they are needs rather than desired products (wants). By definition, shelter is a requirement of survival and thus a product that every consumer must purchase. However, because there is a high availability of substitutes (or options), the demand for housing is relatively elastic. For example, if prices in the housing market become too high, consumers will compromise factors such as location, features, square footage, etc. in order to reduce costs or decide to temporarily rent rather than buy. It is not the price that is elastic, but the demand for the product relative to its current price.

The same is true for the supply of homes; however, people are more "desperate" to sell a home rather than to buy one, and often sell a home at a lower than desirable price to release financial obligations to a property. Therefore, supply in the housing market is more inelastic than demand.

Dave Tufte said...

MJ: 50/50

I think you have your wording backwards at the very end. If "... people are more 'desperate' to sell a home rather than to buy one, and often sell a home at a lower than desirable price ...", then you're describing something that's elastic not inelastic.

Your comment supports a comment I made on another thread. The decision to "buy a house" tends to be inelastic. But when broken down into components, the demand is much more elastic: number of bathrooms is far more elastic with respect to interest rates than is buying the whole house.