If there’s one thing we can count on in America, it’s that our elected officials will see an affordability crisis and respond to it by stimulating the demand side of the market.  Today, we’re seeing this in the case of the housing industry, with Administration officials floating both a new (and improved!) 50-year mortgage and a portable mortgage.  Treasury Secretary Scott Bessent says that both of these will help break the “logjam” of owners who are stuck with their 3% mortgages and are reluctant to move, which will help with the affordability “crisis” in the American housing market.  After all, if more houses come on the market for sale, won’t that push prices down?

This statement belies a fundamental misunderstanding of the difference between supply and quantity supplied.  This distinction matters not just so students can pass their economics exam, but for understanding the actual effects of policy.

How do we use supply and demand in assessing the effects of any change?  Fortunately, once you have correctly drawn a supply and demand graph, there is a three-step process for allowing anyone to “command the heights of genius” as James Buchanan once described.

1. Determine: will this affect demand or supply?
2. Determine: will it increase or decrease?
3. Read changes in price and quantity from the graph.

The first step in understanding the impact of any change in policy is determining whether these new mortgage policies will affect the demand for housing or the supply.  Let’s start with the 50-year mortgage proposal.  The idea here is that this will make loans or credit easier for would-be home buyers to acquire.  That is a demand-side phenomenon. 

At first blush, portable mortgages seem like they would affect the supply side.  After all, such a policy would make it easier for current homeowners to sell, right? However, notice that this policy only affects current homeowners who wish to move and buy a new house. Those who have a house and have no desire to move will be unaffected by this policy.  As a result, this policy also affects the demand side of the housing market.

The second step in our three-step process is to determine what direction the (in this case) demand curve will be moving.  Here, it’s fairly obvious: the demand for housing is going to increase, which means it will move to the right. I depict this below in the move from D1 to D2. 

The final step is to read the changes in price and quantity from the graph.  Here, we can see that as a result of these policies, we should expect the price to increase from P1 to P2 and the quantity to increase from Q1 to Q2.  Importantly, the supply curve did not move whatsoever.

Note that what we have just shown is that Scott Bessent is correct! There will be more houses sold as a result of portable mortgages (and the 50-year mortgage).  The specific point-prediction of exactly how many more is beyond the scope of the analysis here, but the pattern prediction seems obvious.  But this is an increase in the quantity of houses, not an increase in the supply of houses.  As a result, he is incorrect to say that this will make housing more “affordable.”  It will most certainly not – housing prices will increase.

The trick to implementing this three-step plan is to do the three steps in order.  People are often tempted to jump straight to step three and “get to the point.” After all, that’s what people really want to know! Some can jump straight to step three, but I’ve been a student of economics for almost 20 years now. I couldn’t even begin to venture a guess as to how many times I’ve drawn supply and demand on boards in front of classrooms, on sheets of paper during office hours, on exams that I’ve taken… you name it.  I still go through this exact process every single time when I’m confronted with a new problem.

The reason why I go through this process every single time is simple: it works, and it avoids the trap of falling victim to the problem of reasoning from a price change.  It also forces us to really think about what is going on in the market and to think through it clearly and carefully before we rush to any judgments about what we really care about: will this allow more people more access to a good or service?  Will it allow people to live healthier and wealthier (however they choose to define those terms) or will it lead to impoverishment?

These are the questions that really matter. Using supply and demand analysis and this three-step process is a crucial component to understanding the world around us.