Final answer:
Increasing the supply of houses with constant demand typically leads to a decrease in house prices, as sellers might reduce prices to attract buyers. This was reflected in the mid-2000s housing bubble, where a price correction contributed to the recession.
Step-by-step explanation:
When the supply of houses goes up and the demand stays the same, it is likely that house prices will decrease. This is explained by the law of supply and demand, which is a fundamental principle in economics that states that when there is an excess supply (also known as a surplus) of a good or service, prices tend to fall if demand remains unchanged.
In the context of the housing market, an increased supply of houses means more houses are available than there are buyers at the current price. Since demand has not increased, sellers may need to lower their prices to attract buyers. This leads to a downward pressure on prices. Applying this to the financial market for home loans, a decline in house prices can affect the equilibrium price and quantity of home loans. If house prices go down, the amount borrowed for home loans may decrease as well.
Real-World Examples
An example of this was seen in the mid-2000s housing bubble, where housing prices soared unsustainably, and when they fell in 2007 and 2008, it contributed to the recession that began in the same period. Thus, the dynamics of housing prices are critical to individual decisions as well as the broader economy.