What is the economic impact of unemployment?

1.How does unemployment impact the housing market on a S & D Chart? What happens to CS and PS?

• 2. What happens to the housing market when government policies such as the first time home-buyer and mortgage-backed securities are terminated (ref 2009) on an S & D graph? What happens to consumer surplus and producer surplus? Potential Answers: 1) I think that demand will shift downwards. I also think that CS will increase and PS will decrease? 2) I think that demand will increase after policies are removed because the spike in sales created by these policies invoked bidding wars which shied potential home-buyers away and secondly the mortgage rates during that time went up nearly a point which decreased demand. Now that they are removed there in still a massive amount of inventory and buyers are becoming more successful with their bids. With that said I think that producer surplus will increase and consumer surplus will decrease. Tell me what you guys think, I might be off but I think I am close. Thank you.

• Answer:

  1. Greater unemployment means that fewer people have jobs and can afford to buy houses. It may also mean that more people can't afford their existing homes and end up defaulting on their mortgage. Since most home sales are of unique homes, and since home buyers generally buy as much home as they can afford, it isn't clear exactly what the classical definitions of producer and consumer surplus mean in this context. These are usually defined in terms of a single product, not a substitution situation. It is certainly the case that a given home will sell for a higher price when demand for homes in general is higher. But it is generally not purchased by the same person who would have purchased it at a lower price. 2. When purchase subsidies go down, so does demand. If the purchase subsidy decline was anticipated, then in addition to the long term decline you'll also get a short term transfer - with a slightly increased demand before the transition and a decreased (relative to the long term) demand after.