Prices of Homes in California Plunge in the Late 2000s

A major consequence of the housing market crisis has been a significant decline in the home prices

as foreclosures intensified between 2007 and 2008. One of the hardest states hit was California. The median price of a new home in California decreased by 35.3 percent from August 2007 to August 2008. Interestingly, the quantity of homes sold was 13.6 percent higher in August 2008 than in August 2007.

What was the price elasticity of demand for homes in California in the period under examination? Price elasticity of demand is defined as the absolute value of the percentage change in quantity demanded divided by the percentage change in price; in this case, 13.6% 35.3% = 0.39.

Did Californians spend more or less on homes in August 2007 or in August 2008?