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# In January there was a large drop in the number of new

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In January there was a large drop in the number of new [#permalink]

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15 Apr 2004, 08:51
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1.In January there was a large drop in the number of new houses sold, because interest rates for mortgages were falling and many consumers were waiting to see how low the rates would go. This large sales drop was accompanied by a sharp rise in the average price of new houses sold.
Which of the following, if true, best explains the sharp rise in the average price of new houses?
(A) Sales of higher-priced houses were unaffected by the sales drop because their purchasers have fewer constraints limiting the total amount they pay.
(B) Labor agreements of builders with construction unions are not due to expire until the next January.
(C) The prices of new houses have been rising slowly over the past three years because there is an increasing shortage of housing.
(D) There was a greater amount of moderate-priced housing available for resale by owners during January than in the preceding three months.
(E) Interest rates for home mortgages are expected to rise sharply later in the year if predictions of increased business activity in general prove to be accurate.
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15 Apr 2004, 09:14
Cant decide between A and D. D looks fine because increase in number of moderate houses would driveup the average because other kinds of houses are probably not selling that much. A does not talk about number of high priced houses available. Though A can contribute towards the increased average, D contributes even more.
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15 Apr 2004, 11:44
I'd go with C too .. although for a teeny moment A tempted me .

Anandnk it can't be D .... the entire statement deals *only* with new houses i.e number of new houses sold reduced but average price increased. D) talks about 'resale' houses and is hence irrelevant.

For a while i though it was A) ... but without an idea of what percentage of houses were higher-priced it difficult to justify a sharp increase.

C) on the other hand implies that a shortage results in higher price => large drop should have seen a sharp rise in average price.

--HTH

Last edited by Version2 on 15 Apr 2004, 11:53, edited 1 time in total.
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15 Apr 2004, 11:45
Between A & C............will go with C!!
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15 Apr 2004, 11:59
Well now I have another explanation for D.

If lot of moderately priced houses are available for resale then people may not but new houses thus reducing the possibility of new houses being sold even further. If all those moderately sold houses are sold out then the demand could shootup for whatever (new) houses are available causing the average price of new house being sold to go up.

Am I trying to walk on water or walk through the wall here?
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15 Apr 2004, 12:12

If the interest rates are gonna go up....later in the year..The home owners would increase their prices so that the people who see the interest rates going up would decide they are gonna go highere still and buy it immediately...???????????May be I am crazy...But I think its better to make mistakes now than on the G-day
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15 Apr 2004, 12:20
E is quite true in United States atleast.
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15 Apr 2004, 13:10
Guys, I have to go with A on this one.
C is actually the opposite of what the argument says. What is a shortage of houses? It is a situation where there are too few houses available for the number of buyers out there and that is why house prices have been that high in the last 3 years. Yet, C does not help resolve the paradox because the stem says that the number of buyers declined(too many houses available) on top of an increase in the average house price. How can that be? More houses available but yet house prices still increase?! There must be something else which explains that.

A is a possible explanation. If there are less houses sold but among those sold, most are luxury houses, then when you divide the total price of houses sold by the number of houses sold, the average price of houses MUST be higher.
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15 Apr 2004, 13:23
Paul,

You are correct. I read this again and 'C' can't be correct. While C does say that shortage causes price increase .... the argument however doesn't really imply that there is shortage : in fact it implies that there is an excess of houses in the market.

So A) is right.

For whatever reason when i read this the first time i interpreted " There was a large drop in the number of new houses sold' as ' There were less sellers ' instead of ' there were less buyers' .

I think on exam day i should take prozac and caffeine
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15 Apr 2004, 14:21
why is E wrong???I dont see anybody even considering E....explain...
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15 Apr 2004, 17:28
Another good question!

I would go with A
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15 Apr 2004, 17:39
monarc wrote:
why is E wrong???I dont see anybody even considering E....explain...

E contradicts the premise and does not solve the paradox. Argument says that people will wait to see how interest rates will drop before they will consider buying a house. However, E says that rates are expected to rise sharply. This means that consumers should NOW be jumping on new house offers BEFORE rate hikes. Yet, this is not what given scenario says. It says that consumers are NOT BUYING NOW but house prices are STILL increasing. E does not solve the paradox
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15 Apr 2004, 18:28
A is a very strong contender here.

Assume there were 50 houses worth 100K each and 2 500K houses
Average = 50000/50 = 100K
Now only 10 50K houses are sold and 2 500K houses are sold
Average = 6000/12 = 500K

This is what A says as far as new houses are concerned.
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15 Apr 2004, 19:29
Paul,

You are smart but do you realise that stem is talking about new houses, not just those which are "higher-priced". any explaination.
I chose C for this, but i was wrong. QA will follow shortly.
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16 Apr 2004, 07:04
Hi mbamantra,

There is nothing wrong in posting the answer ahead ans still have the discussion. When do you think you will post the answer? From your posting it appears that A is not the answer. Can you verify whether the argument has any typos?

Anand.
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16 Apr 2004, 07:15
I still stand for A given that all other answers can be refuted. Even though the question is talking about new houses, the fact that A comprises all higher priced houses(new+resale) will ultimately affect the price of new average-priced houses
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# In January there was a large drop in the number of new

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