10/15/2007

Housing decline expected to last to 2009

This article really hit home for me because it directly affects my livelihood because of the slowing of the housing market it discusses. Several factors have contributed to the slowing of the housing market which has created a glut in the supply of homes, moving prices downward. The article suggests that the current trend is expected to continue through 2009 and possibly through 2010.

I see this as a classic example of the effects of supply and demand in our market. Demand was created when the Fed cut interest rates making housing more affordable. People and lenders reacted by buying up the available supply of inventory quickly causing a shortage of homes. Builders (and everyone that owned a truck) responded by bringing huge numbers of homes to the market to satisfy the demand that was created. I actually think a good portion of the demand was artificially created by out of town speculators hoping to flip the homes for a quick profit; and the early movers did make a profit. Soon, supply outpaced demand as the prices increased and the interest rates were raised by the Fed, causing a glut of homes and causing the prices to fall.

I hope that the government lets some of these speculators and sub-prime lenders fall on their financial faces. I feel much the same as the test question on our last iClicker quiz suggested about bankruptcy not being a totally bad thing. It will weed out the weak suppliers and will help our market get back to basics and help turn our market around. It may be painful, but I feel it is a necessary step in the circle of our economic lives.

6 comments:

Dr. Tufte said...

I have some minor issues here.

First, don't blame the Fed. They don't care much about the housing market, and they're not supposed to. Yes, they've contributed to problems in the housing market, but when you look at their primary job, they're doing fine.

Second, you're absolutely right that this is a good time to clean out some of the speculators and poorly-managed firms.

Third, one thing that we don't talk about too much with housing is that the age of the housing stock in the U.S. is actually pretty high. I think the reason that we've had these waves of housing bust and boom is that we haven't cleared out our excess demand for newer and better homes. So, mark my words, we'll be doing this again in a few years.

Logan said...

Housing markets in general have peaks and valleys. It is a constant wave going up and down and you can count on it happening over and over again.

The only difference I can see in the waves is how high and low they get, and how far apart (time wise) the peaks and valleys are.

I agree that speculation and overbuilding assisted in the height and speed of the current tide, but I believe it is the nature of the housing industry itself that creates the waves in the first place.

If prices never went down, they would either remain the same or increase. This means that (all other things being constant) the same house purchased 50 or 100 years ago would cost the same or relatively the same (compared to similar homes) today as it did initially.

If that was true, where would be the benefit in building more homes, or bigger, fancier homes for that matter? Developers and speculators get into the game because they feel the market is ready to give them a return for their money that is larger today than it will be tomorrow. Timing is the issue here. My dad always tells me that the 3 rules of real estate are location, location, location, and timing. I know this is 4 not 3 rules, but you get the point.

In this way, the housing market is like the stock market. Stocks are bought and sold based on the speculation that the stock value will be different tomorrow. If the prices all remained the same, or all grew at the same rate, the motivation to get in and out quickly would be gone.

Personally, I enjoy things like the housing and stock market ebb and flow because they keep us in check. When the market is up, everyone gets excited and comes up with new ways to improve the market. When the market is down, only the most efficient survive. Thus the economy is constantly trying new things and only keeping the best parts.

Sophie said...

It is definitely time that some of these speculators and developers have to pay for the choices that they made. Many of these individuals and companies were looking to make some quick and easy money. Too bad the market flipped before many of them could do so, and now these big shots cannot pay their bills. Therefore, these inadequately run operations are being forced to leave the industry. Good riddance!

Gavin said...

Extra Credit - Dr. Tufte
I had not considered the demand for new homes was influenced by the age of old homes. Most likely the stock of older homes will be hit hardest in the long-run because consumers would rather have a newer home at relatively the same price.

William said...

Dr. Tufte,
It seems a little scary to think that we will be 'doing this again in a few years.' Don't you think that our society will learn their lesson? I at least hope that we can learn from this mistake. Obviously there are going to be times where the market is better and there are times where it isn't as good, but I hope that we don't go through the same hardship that we currently are.

Dr. Tufte said...

No, we won't learn the lesson.

It simply isn't an easy thing to learn when you are talking about things that take time to build, and which can be stored with a low rate of depreciation.