Thursday, March 06, 2008

Falling Prices:The Real Solution to Housing Collapse

Economist Steven Landsburg made the "case for foreclosure" in Slate.com, and was featured in this CD post on Tuesday.

Writing in today's IBD, columnist Robert Samuelson makes a convincing case for falling home prices as the only real solution to the country's housing problems:

Gloom. Doom. Calamity. Home prices are tumbling. We're bombarded by somber reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse.

The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last.

It's elementary economics. Pretend that houses are apples. We have 1,000 apples, priced at $1 each. They don't sell. We can either keep the price at $1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.

Even many economists who should know better describe the present situation as an oversupply of unsold homes. True, there is about 10 months' supply of existing homes as opposed to four a few years ago. But the real problem is insufficient demand.

There aren't more homes than there are Americans who want homes; that would be a true surplus. There's so much supply because many prospective customers can't buy at today's prices.

12 Comments:

At 3/06/2008 12:04 PM, Blogger David Damore said...

If the problem is falling prices, how is it that "Falling Prices Will Solve Our Housing Problems"?
As stated at the end of the post "...the real problem is insufficient demand."
Insufficient demand is the problem? If potential home buyers know prices [and perhaps interest rates] are going to fall, why would they buy today?
It appears that the Fed is signaling lower interest rates are on the way. They need to make clear that rate decreases are coming to an end and that rates may be going up very soon to battle inflation.
If buyers see prices stabilize and the risk of higher rates appears imminent, people will buy now rather than later.
There is no cost to buyers holding back right now. When it appears that home prices and interest rates are going up there is a cost to waiting.

 
At 3/06/2008 12:41 PM, Anonymous Anonymous said...

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, Governments can confiscate, secretly and unobserved an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity (or fairness) of the existing distribution of wealth.

As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

 
At 3/06/2008 12:49 PM, Anonymous Anonymous said...

http://quotes.ino.com/chart/?s=NYBOT_DX&v=d6

The net wealth of U.S. households fell for the first time in five years during the fourth quarter last year as the value of real estate holdings and stocks weakened, the Federal Reserve said on Thursday.

The U.S. central bank's "flow of funds" quarterly report showed the net worth of American households dipped to $57.72 trillion in the final three months of 2007 from a revised $58.25 trillion in the third quarter.

http://www.reuters.com/article/bondsNews/idUSN0648283420080306
Of course if you factor in the loss of puchasing power of the dollar they lost a hell of alot more then that in real terms.

 
At 3/06/2008 1:56 PM, Anonymous Is said...

David,

"If potential home buyers know prices [and perhaps interest rates] are going to fall, why would they buy today?"

Because the lower prices and rates continue to fall, the more others become interested and willing to buy property. There is no guarantee that the homes will still be available if one chooses to wait. Someone else may pull the trigger. Regardless, even if potential buyers are waiting for prices and rates to fall, this is still indicative of a lack of demand at the current prices and rates.

"There is no cost to buyers holding back right now".

Except for the fact that some other potential buyer may be interested at the current price. The more prices fall, the more demand there will be. At the current costs, there is not sufficient demand to get the houses off the market.

 
At 3/06/2008 2:27 PM, Anonymous Anonymous said...

Household percent equity was at an all time low of 47.8%.

These poor bastards never saw it comming.

 
At 3/06/2008 3:00 PM, Anonymous Anonymous said...

http://quotes.ino.com/chart/?s=NYBOT_CI&v=dmax

http://quotes.ino.com/chart/?s=NYBOT_DX&v=dmax

U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Federal Reserve Board Governor Ben S. Bernanke, Deflation: Making Sure "It" Doesn't Happen Here

Look it works

 
At 3/06/2008 5:13 PM, Blogger David Damore said...

Is Said,

Prices are falling and interest rates are falling.
Are more buyers rushing into the market?
No [not yet]. Buyers are waiting. There is no money lost in waiting for prices to hit bottom [level, reach equilibrium, etc].

Certainly you are correct that a specific piece of property/home may be lost to another buyer, so what... there are thousands more just like it.

Home prices are still falling. Would you buy a home today if you thought that in 6 months the value was going down? Probably not.

If prices stabilize and rates appear to be going up soon buyers will look to make deals [Now], as waiting until prices [and interest rates] increase carries a real dollar cost.

Thoughts
- Prices need to get to or close to equilibrium
- Inventory needs to be reduced
- People buy assets [such as real estate, stocks etc] they think are going up in value not down.
- People buy now if it will cost more later.
- People wait for and seek the best price [think of people who wait for the day after Thanksgiving or any other big sale event]. People buy then because they believe it is the absolute lowest price available.


How do we get [more] buyers to meet with sellers to negotiate and consummate a deal?


Your prior & future comments are appreciated.
David

 
At 3/06/2008 6:44 PM, Blogger juandos said...

"These poor bastards never saw it comming"...

You mean these people were either to stupid, to lazy, or to preoccupied with nonsense to pay attention to their own belongings?

 
At 3/06/2008 11:47 PM, Anonymous Anonymous said...

6% of mortgages in default and 2% in foreclosure!

Sitting back
waiting and watching
house prices fall
when the cat lies still
and bounces no more
there in I shall step
to gather a bounty
that others consumed
by fear and greed
shun.

 
At 3/07/2008 7:01 AM, Anonymous Anonymous said...

Sheesh, has Samuelson never heard of the housing wealth effect? It is not good news for housing prices to decline as personal consumption expenditures will decline and the savings rate will increase. It must be Samuelson's wish for the recession to be long and deep.

As to Samuelson's contention that there is not a surplus of housing, that's utter delusion. According to the Census Bureau, vacant housing for sale is at record highs normalized to the existing housing stock.

 
At 3/08/2008 11:53 AM, Blogger juandos said...

"As to Samuelson's contention that there is not a surplus of housing, that's utter delusion. According to the Census Bureau, vacant housing for sale is at record highs normalized to the existing housing stock"...

Hmmm, neither one of your links said where these empty houses are standing...

Here in St. Louis county and St. Louis city there are LOTS of empty houses but I'm willing to bet you wouldn't move into any of them even if you got one as a tax free gift...

Note the following CNN Money article dated Jan. 3 of '06: Most overvalued housing markets

 
At 3/08/2008 4:24 PM, Anonymous Anonymous said...

On Vacant Houses

Vacant Homes in U.S. Climb to Most Since 1970s With Ghost Towns


17.77 million housing units are vacant (Census Bureau) right now!

 

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