In the grand theater of American politics, one can always count on our elected leaders to tackle an affordability crisis by drumming up demand, rather than addressing the root supply issues. This latest spectacle revolves around the housing market, where officials are enthusiastically promoting a shiny new (and improved!) 50-year mortgage and a portable mortgage. Treasury Secretary Scott Bessent argues these innovations will help dissolve the “logjam” of homeowners clinging to their comfortable 3% mortgages, thus alleviating the so-called affordability “crisis” in the housing sector. After all, flooding the market with more houses surely means prices will drop, right?
Such assertions reveal a fundamental misunderstanding of the distinction between supply and quantity supplied. This distinction matters more than just for passing economics exams; it’s essential for comprehending the real impacts of policy changes.
How does one effectively apply supply and demand analysis to assess the effects of any policy shift? Luckily, once you’ve sketched out a supply and demand graph, you can follow a straightforward three-step process to channel your inner economist, as James Buchanan so eloquently put it.
- First, determine: will this change impact demand or supply?
- Next, ascertain: will it increase or decrease?
- Finally, interpret the changes in price and quantity from the graph.
To start, we need to analyze whether these new mortgage policies will influence the demand for housing or the supply. Let’s examine the proposal for a 50-year mortgage. Its premise is to make loans or credit more accessible to potential homebuyers. Clearly, this is a demand-side influence.
At first glance, portable mortgages might appear to impact the supply side. After all, such a policy could facilitate current homeowners in selling their properties. However, this policy only benefits those homeowners who wish to move and purchase a new house. Homeowners content with staying put will remain unaffected, thus this policy also has ramifications for the demand side of the housing market.
Now, let’s proceed to the second step: determining the direction of the demand curve. Here, it’s quite evident: the demand for housing is likely to increase, shifting the curve to the right, as illustrated from D1 to D2.
In our final step, we examine the shifts in price and quantity from the graph. We can predict that as a result of these new policies, prices will rise from P1 to P2, while the quantity will increase from Q1 to Q2. Importantly, notice that the supply curve remains unchanged.
It’s worth noting that while Scott Bessent’s assertion holds true—more houses will indeed be sold due to the introduction of portable mortgages and the 50-year mortgage—this increase pertains to the quantity of houses available, not an increase in the supply of houses. Therefore, his claim that this will enhance housing affordability is misguided; in reality, housing prices are likely to rise.
The key to successfully implementing this three-step analysis is adhering to the order of operations. It’s tempting to leap straight to step three and “cut to the chase.” While some individuals may have a knack for this, I’ve been immersed in the world of economics for nearly two decades. I can’t even begin to count how many times I’ve sketched supply and demand curves in classrooms, during office hours, or on various exams. Yet I still employ this exact method each time I face a new economic conundrum.
Why do I stick to this method? Simple: it yields results and helps to avoid the pitfalls of reasoning from a price change. It compels us to thoughtfully analyze market dynamics before rushing to conclusions about vital questions: Will this enhance access to goods and services? Will it enable individuals to lead healthier and wealthier lives, as they define it, or will it lead to greater impoverishment?
These inquiries are what truly matter. Employing supply and demand analysis alongside this three-step framework is essential for grasping the complexities of our economic landscape.
