If there’s one thing we can hope for in America, it’s that our elected officials will see the affordability crisis and respond by stimulating the demand side of the market. We are seeing this today in the case of the housing industry as well, with government officials proposing both new (and improved!) 50-year mortgages and portable mortgages. Treasury Secretary Scott Bessent said both would help break the “impasse” of owners with 3% mortgages who are reluctant to move, and would help solve the affordability “crisis” in the U.S. housing market. After all, if more homes come up for sale, wouldn’t prices go down?
This statement confirms a fundamental misconception about the difference between supply and quantity supplied. This distinction is important not only for students to pass economics exams, but also for understanding the effects of current policies.
How do we use supply and demand to help us assess the impact of change? Fortunately, there is a three-step process that allows anyone to “command the heights of genius,” as James Buchanan once put it, if they can draw a supply and demand graph correctly.
Determine if this affects supply and demand. Decide whether it will increase or decrease. Read price and quantity changes from the graph.
The first step in understanding the impact of policy changes is to determine whether these new mortgage policies affect the demand or supply of housing. Let’s start with the 50-year mortgage proposal. The idea here is that this makes it easier for prospective homebuyers to obtain loans and credit. It is a demand side phenomenon.
At first glance, portable mortgages seem to have a supply-side impact. After all, wouldn’t such a policy make it easier for current homeowners to sell? However, keep in mind that this policy only affects current homeowners who wish to move or purchase a new home. People who own a home and have no intention of moving will not be affected by this policy. As a result, this policy also affects the demand side of the housing market.
The second step in the three-step process is to determine in which direction (in this case) the demand curve will move. Here it is very clear. The demand for housing will increase, which means it will move to the right. This is explained below in moving from D1 to D2.
The final step is to read the price and quantity changes from the graph. Here we can see that as a result of these policies, price is expected to rise from P1 to P2 and quantity is expected to increase from Q1 to Q2. Importantly, the supply curve did not move at all.
Note that what we have just shown is that Scott Bessent is correct. More homes will be sold as a result of portable mortgages (and 50-year mortgages). Predicting the specifics of exactly how many more there will be is beyond the scope of our analysis here, but the pattern seems obvious. But this is an increase in the quantity of housing, not an increase in the supply of housing. He is wrong to say that housing will become more “affordable” as a result. That definitely won’t happen. Housing prices will rise.
The trick to implementing this three-step plan is to follow the three steps in sequence. People are often tempted to jump straight to step three and “get down to business.” After all, that’s what people really want to know! Some people move on to step 3 right away, but I’ve been a student of economics for almost 20 years now. I can’t even begin to guess how many times I’ve drawn supply and demand on the board in front of my classroom, on a piece of paper during work hours, or on a test I’ve taken. I still repeat this exact process every time I encounter a new problem.
The reason I go through this process every time is simple. This is effective because it avoids the trap of falling victim to inference problems due to price fluctuations. You should also seriously consider what’s going on in the market and think clearly and carefully before making hasty judgments about what really interests you. Will this give more people access to goods and services? Will it help people live healthier, more prosperous lives (though everyone has their own definition of that term), or will it lead to poverty?
These are really important questions. Using supply and demand analysis and this three-step process is a key element in understanding the world around us.
