Thursday, March 6, 2008

It's Not an Inventory Problem, It's a Price Problem

I caught this article in the Washington Post today "The Housing Fix"

"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 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 months' 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."

Robert hits the nail on the head. House prices are elastic, i.e. when prices drop, demand increases. Portland's 12 months of supply will only drop when prices come back in line with demand, and now that cheap and cheerful credit is gone, so are lots of low end buyers. They will either need to save more for a down payment (not likely given our credit card society) or house prices will have to drop to affordable levels. Preventing foreclosures, renegotiating loans that people never could afford in the first place only prolongs the issue.

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skeptictank said...

Yes, Yes, Yes. A lot of us have been saying this for well over a year now.

But of course now the problem has progressed: Even if prices fall credit may not be available (causing prices to fall even more). Citi Bank announced today that they were going to be drastically cutting their mortgage lending this year, for example.

I suspect that by the time sellers in PDX start to capitulate (well, that's happening in pockets already) and lower their prices that credit will be very difficult to come by... leading to more markdowns... rinse and repeat. Vicious cycle?

Tighter credit means that what might have been affordable last month may not be attainable next month.

PDXOutsider said...

i'm seeing lots more price decreases, but i hope buyers figure it out soon before their target market shrinks further.

elneal said...

shrinking target market, houses apples- I think the wary buyer will wait and see what happens on the commercial side of real estate before deciding to jump into the residential side with both feet....and why not? Isn't it the rush (of home buying) that was part of the problem?
The author mentions apples- what about all the rotten ones out there that no one wants at any price?