September 5th, 2008, 12:22 pm
I thought a Giffen good was an inferior good in which demand for the good was high in the presence of high unchanging prices and demand was low in the presence of low unchanging prices. That is, demand for Giffen goods is not a direct function of the rate of change of prices -- their demand pattern isn't created by speculation, hoarding, avarice, or risk aversion. Rather, it is a phenomenon in which consumers have less demand for superior goods (e.g., meat) and more demand for inferior Giffen goods (e.g, wheat) in the presence of high prices.Housing is a more complex for three reasons. First, the speculative nature of the purchase means that demand is a function of expected rate-of-change of price (unlike a Giffen good in which demand is a function of price alone). Second, housing displays a discrepancy between price actually paid by consumers (downpayment + monthly mortgage) versus the nominal asset price. Rising mortgage interest rates and rising downpayment requirements actually imply that housing has become more expensive (to consumers) in the last year even if the price on the deed of sale has fallen. Third, chary lenders have reduced the eligible home-buying population with much more restrictive credit.