There are four steps in the basic adjustment mechanism. First, the initial equilibrium price Ro is determined by the intersection of the supply of existing housing stock SH and the demand for housing D. This rent is then translated into value Vo via discounting cash flows. Value is calculated by dividing current period rents by the discount rate, that is, as a perpetuity. Then value is compared to construction costs CC in order to determine whether profitable opportunities exist for developers.
The intersection of construction costs and the value of housing services determine the maximum level of new housing starts HSo.
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Finally the amount of housing starts in the current period is added to the available stock of housing in the next period. In the next period, supply curve SH will shift to the right by amount HSo. The diagram to the right shows the effects of depreciation. If the supply of existing housing deteriorates due to wear, then the stock of housing supply depreciates.
Because of this, the supply of housing SHo will shift to the left to SH1 resulting in a new equilibrium demand of R1 since the number of homes decreased, but demand still exists. The increase of demand from Ro to R1 will shift the value function up from Vo to V1. As a result, more houses can be produced profitably and housing starts will increase from HSo to HS1.
Then the supply of housing will shift back to its initial position SH1 to SHo. The diagram on the right shows the effects of an increase in demand in the short run. If there is an increase in the demand for housing, such as the shift from Do to D1 there will be either a price or quantity adjustment, or both. For the price to stay the same, the supply of housing must increase.
That is, supply SHo must increase by HS.
The diagram on the right shows the effects of an increase in costs in the short-run. If construction costs increase say from CCo to CC1 , developers will find their business less profitable and will be more selective in their ventures. In addition some developers may leave the industry. The quantity of housing starts will decrease HSo to HS1. This will eventually reduce the level of supply from SHo to SH1 as the existing stock of housing depreciates. Prices will tend to rise from Ro to R1. There are different ways of real estate financing: governmental and commercial sources and institutions.
A homebuyer or builder can obtain financial aid from savings and loan associations, commercial banks, savings banks, mortgage bankers and brokers, life insurance companies, credit unions , federal agencies, individual investors, and builders. Over the last decade, residential prices increased every year on average by double digits in Beijing or Shanghai.
However many observers and researchers argue that fundamentals of the housing sector, both sector-specific and macroeconomic, may have been the driving force behind housing price volatility. The most important purpose of these institutions is to make mortgage loans on residential property.
These organizations, which also are known as savings associations , building and loan associations , cooperative banks in New England , or homestead associations in Louisiana , are the primary source of financial assistance to a large segment of American homeowners. Some of the most important characteristics of a savings and loan association are: . Due to changes in banking laws and policies, commercial banks are increasingly active in home financing.
In acquiring mortgages on real estate, these institutions follow two main practices: . In addition, dealer service companies, which were originally used to obtain car loans for permanent lenders such as commercial banks, wanted to broaden their activity beyond their local area. In recent years, however, such companies have concentrated on acquiring mobile home loans in volume for both commercial banks and savings and loan associations.
Service companies obtain these loans from retail dealers, usually on a non-recourse basis. Almost all bank or service company agreements contain a credit insurance policy that protects the lender if the consumer defaults. These depository financial institutions are federally chartered, primarily accept consumer deposits, and make home mortgage loans.
A Dynamic Model of Housing Demand: Estimation and Policy Implications
Mortgage bankers are companies or individuals that originate mortgage loans, sell them to other investors, service the monthly payments, and may act as agents to dispense funds for taxes and insurance. Mortgage brokers present homebuyers with loans from a variety of loan sources.
Their income comes from the lender making the loan, just like with any other bank. Because they can tap a variety of lenders, they can shop on behalf of the borrower and achieve the best available terms. Despite legislation that could favor major banks, mortgage bankers and brokers keep the market competitive so the largest lenders must continue to compete on price and service.
According to Don Burnette of Brightgreen Homeloans in Port Orange, Florida, "The mortgage banker and broker conduit is vital to maintain competitive balance in the mortgage industry. Competition drives every organization in this industry to constantly improve on their performance, and the consumer is the winner in this scenario.
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Life insurance companies are another source of financial assistance. These companies lend on real estate as one form of investment and adjust their portfolios from time to time to reflect changing economic conditions. Individuals seeking a loan from an insurance company can deal directly with a local branch office or with a local real estate broker who acts as loan correspondent for one or more insurance companies. These cooperative financial institutions are organized by people who share a common bond—for example, employees of a company, labor union, or religious group.
Some credit unions offer home loans in addition to other financial services. Under certain conditions and fund limitations, the Veterans Administration VA makes direct loans to creditworthy veterans in housing credit shortage areas designated by the VA's administrator. Such areas are generally rural and small cities and towns not near the metropolitan or commuting areas of large cities—areas where GI loans from private institutions are not available.
The federally supported agencies referred to here do not include the so-called second-layer lenders who enter the scene after the mortgage is arranged between the lending institution and the individual home buyer. REITs, like savings and loan associations, are committed to real estate lending and can and do serve the national real estate market, although some specialization has occurred in their activities.
Individual investors constitute a fairly large but somewhat declining source of money for home mortgage loans.
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Experienced observers claim that these lenders prefer shorter-term obligations and usually restrict their loans to less than two-thirds of the value of the residential property. Likewise, building contractors sometimes accept second mortgages in partial payment of the construction price of a home if the purchaser is unable to raise the total amount of the down payment above the first mortgage money offered. In addition, homebuyers or builders can save their money using FSBO in order not to pay extra fees.
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In most European countries however, housing policy has undergone fundamental changes in recent decades. The policy focus has shifted from supply to demand and from government-dominated social housing to a more market-oriented approach. Since the beginning of the s housing policy has gone through decentralisation, privatisation and deregulation. Social housing policy has become more market-oriented in order to meet the expectations of the increasingly individualised preferences of consumers.
In this model, available properties are advertised in local or regional newspapers or on the Internet and customers can choose the dwelling they prefer but may apply only if they meet certain criteria. Many housing associations believed that the liveability of an area would improve if more house seekers were able to choose for themselves in which neighbourhood they wanted to live.
In all member states there are housing regulations defining the framework of social housing, its beneficiaries and rules of construction funding. Among other things, detailed criteria are stipulated for accessing social dwellings.
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Czischke and A. Pittini distinguish between two allocation models: universalistic and targeted. In the universalistic model of allocation, the housing sector is treated as the social responsibility of municipal housing organisations e. Social housing, should regulate the market via different tools such as rent control in order to provide the entire population access to affordable housing of an acceptable standard.
The targeted system, on the other hand, is based on the assumption that the aims of housing policy will be met mainly by the market e. Only those households that are unable to satisfy their housing needs in the open market can be the beneficiaries of the social housing stock.
Due to the multitude of types and sizes of social housing sectors and related allocation criteria, D. In recent years we have been witnessing significant changes in the system of social housing allocation. The methods of ranking applications for social dwellings have been greatly modified. European experience demonstrates a general tendency in which the traditional allocation mechanism, based solely on the criterion of need, is replaced by a system that lets tenants exercise choice though only to a limited extent.
An example of the new approach is announcing unoccupied social flats in the press, which gives prospective tenants the chance to apply for a particular dwelling that addresses their needs. The issue of current changes in the social dwelling allocation procedure has been closely examined by I. Cole, B. Iqbal, L. Slocombe and T. Trott An innovative solution to the problem of social housing allocation, a sort of breakthrough solution, is the so-called Delft system, applied in most Dutch municipalities.
The name of the system stems from the Dutch city of Delft, where the system was put into practice for the first time at the beginning of the 90s. In line with the principles of the system, housing associations publish information about available social dwellings in the local press and on the dedicated web forums. In this way, an announcement can reach all prospective tenants registered on the waiting lists. All those interested in the announcement can visit the property and apply for it.
Related Choice and Allocation Models for the Housing Market
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