Reply #35: Breaking: housing prices collapse [View All]

[ozymandius]

from Kos diarist Jerome a Paris:

This is not quite the headline in today's WSJ, but a quick look at the numbers buried in the article show some stunning trends:

New Home Sales Soared 16% As Prices Declined in April

WASHINGTON -- New-home sales soared in April, an unexpected surge marking the biggest climb in 14 years, according to a report that showed declining inventories and signaled hope for the long-suffering housing sector.

This title and lede probably deserve a prize for "most misleading journalism"...

The typical cycle in a house bubble is that transactions first freeze as buyers become unwilling or unable to pay the high market prices. Sellers first refuse to change their requirements, and, as the market slows down, will rather wait than lower their price. Thus the number of transactions will go down before the prices. It is only when people start being forced to sell that prices actually go down, as they need to bring down prices to actually sell. Then transaction numbers will pick up as prices accelerate their downward move. Then transactions will slow down again as prices reach their bottom, with few buyers and few sellers (only those forced to that did not do it previously). As the market regains its footing, both prices and number of transactions will finally start increasing again.

What is uncertain is what kind of an impact the housing slump will have on the economy. There are two ways it could be nasty:

* the wealth effect: people no longer can withdraw equity from their houses to pay for spending. Thus consumptions drops;
* the jobs effect: with so many jobs of the jobs created lately being in construction - and the financing of real estate - in recent years, it is likely that a number of them will disappear, and thus push up unemployment rates.

Both of these will further depress the housing market, and may put a number of people in dire financial straits, especially if they have one of the more exotic loans that were offered in the past 3 years.

Bur hey, the number of transactions increased! all is well!