In your opinion, what is the most important factor in determining house prices? To what extent can you show that it is?

MOST IMPORTANT FACTOR IN DETERMINING HOUSE PRICES Student's Name: Institutional Affiliation: Course Title: Instructor's Name: Due Date: Most Important Factor in Determining House Prices Introduction The factors that affect the price of a house are location, availability of houses, rates of interest, inflation rates, and policies by the government, among others. Supply and demand have been more helpful in analyzing house prices in the United States. When there is a high demand for homes and low supply, costs are higher; when supply is high, and demand is low, costs come down. The prices will also be high in large cities or regions where space is scarce for construction, with high demand and low supply. While other variables, including interest rates or government policies, may contribute to housing affordability and market forces of demand, supply is the most influential in determining house prices. Therefore, this essay will focus on how supply and demand influence housing prices and why they are the most critical determinants of the price of houses. Literature Review Supply and demand remain two of the most significant variables when setting house prices, and this is part of what makes this field of study so popular. As per the fundamental laws of the economy, the cost of a particular good is likely to go up if the demand increases while the supply remains the same (Ryan-Collins, 2019). This principle applies especially to the housing market since there is a limited stock of homes, and more people keep coming into the market, thus pushing up the price. Using the theory of urban economics, Glaeser and Gyourko (2018) show that competition for housing units tends to increase with population density, leading to higher prices to match supply and demand. However, whereas population density is a measure of population growth, another factor in housing stock availability is the availability of land. The specification of land scarcity is significant for urban housing because the land is geographically limited and regulated by laws governing zoning. According to Sirmans (2005), the findings indicate that in cities with low availability of land, such as New York, the available land influences the housing price. Therefore, supply reduction remains unmatched by increased demand as prices keep rising (Tu et al., 2021). Such conditions in the cities' high demand but restricted supply contribute to the argument as to whether supply and demand are the leading factors contributing to housing prices. The fourth determinant is interest rates, which are not very influential, as the other factors are very influential in the housing market. Low interest rates reduce the amount of money required by people to borrow to buy homes. These rates lead to an increase in demand for houses due to easy access to mortgage financing, thereby increasing the prices of the houses (Wellings, 2006). On the other hand, when the interest rates go up, the cost of capital is high, demand is low, and in most cases, price increase is checked. The following is a case study of this relationship in the US housing sector through a report by the Federal Reserve (2022). Therefore, the increase in interest rates in 2021 and 2022 led to housing price appreciation, particularly in high-priced cities. The demand for houses is another fundamental determinant of house prices, especially concerning government policies that manipulate availability. Some policies include subsidies for home buying, tax credits, and alterations of the zoning regulations of an area because they determine the accessibility of housing (Peña-García et al., 2020). For instance, the US government enacted first-time homebuyer tax credits in 2008 to boost home sales, which increased prices slightly for some time. However, measures limiting housing options, such as rent controls or challenging construction requirements, can decrease housing offers and raise prices (Ive and Gruenberg, 2000). According to Chen and Antonelli (2020), the historical analysis showed that when rent controls are applied, longer-term housing production is usually lowered, and affordability issues worsen with higher market costs. Real-life cases further explain how forces of supply and demand influence house prices. For instance, the housing market in 2008 is an excellent example characterized by a mismatch between the supply of houses and demand. In the early 2000s, before the housing market's collapse, this lead was fraught with loans made to risky borrowers, fueling the demand for homes (Pata, 2021). But when demand suddenly reduced because of interest rate hikes and economic fluctuations, too many houses were choking the market as prices dropped significantly (Kaufman et al., 2020). Taken together with the recent erosion in demand, this event reveals that shifts in both demand and supply can substantially impact housing prices. Likewise, in emergent ...