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Colorado Housing Crisis

Recovering from the housing crisis caused by the economic downturn of 2008, Americans are slowly gaining interest in entering the market again as buyers. Just as we have studied, prices are often the most efficient way to clear a market and create a perfect matching. This idea of a perfect matching (in which every buyer ends up with the good that they desire most) is the focus point of theoretical study, but as we see in the real world, it is most often an idealized goal rather than a plausible outcome.

In Fort Collins, Colorado, we see an extreme version of a real world market matching process. Lowered unemployment has led to droves of potential buyers entering the market, with unchanging quantity of available homes. As of November, the vacancy rates have been as low as they have been for decades. The problem with this market is that there are much too many buyers yielding a large constricted set, and since this is the case there will never be a perfect matching. What need be done, at least in theory, is the installment of higher real prices for homes. This can be done in one of two ways—either wage rate drops or prices of houses increase. Since it is very difficult to control such a thing as price in the labor market, sellers of houses must go with the latter and increase housing prices. This will decrease the amount of buyers in the market, and it will ensure that the people that have the highest valuations for the homes will acquire them. Of course once you start asking these questions normative economics comes into play, as skyrocketing housing prices wouldn’t be what one would call ethical in this environment.

What makes this market even more complex to analyze is the fact that these houses are rented out/sold on a first come, first serve basis. With this in mind, we quickly see the differences that this set up has as opposed to an auction set up. For almost any house for rent or sale there will be multiple buyers who will be willing to pay the ask price, and there is rarely if ever a bidding war between parties. It is hard to do a round by round price increase like the examples we did in class, because it would be a dominant strategy for the house hunters to lie and try to pull better prices (increasing their payout).

Another characteristic that adds difficulty to the situation is the ease with which this market can change. Fort Collins is used by many Colorado State University students for housing, so there are ever changing amounts of buyers (and sellers), with peak months occurring over summer right before the school year. With this sort of fluidity it is impossible to permanently solve such a crisis, but the solution that Colorado is most likely to pursue is the installment of more housing opportunities (i.e. increasing the amount of sellers in the market and getting rid of this constricted set).

Source: http://www.coloradoan.com/article/20121104/BUSINESS/311040006/Renting-turns-competitive-tight-housing-market?odyssey=tab%7Ctopnews%7Ctext%7CFRONTPAGE

 

Sterling

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