US house prices in freefall -- redux

[Kidlicious]

Ben,

We've been through this. This crisis is causing a huge slow down in home building. In fact, I'm sure a lot of home builders are going to close up shop before this is all over.

[Ben Kenobi]

It's a trick question because comparing house prices to petrol prices is disingenuous at best or just simply stupid.

The point being that you would expect to see housing sales rise if the price drops and the demand remains the same.

[snoopy369]

You know about elasticity, right?

[Kontiki]

Originally posted by Ben Kenobi


The point being that you would expect to see housing sales rise if the price drops and the demand remains the same.

Why would prices drop if demand remained the same?

[Ben Kenobi]

You know about elasticity, right?

Yep. Some things are very inelastic, in that the demand won't change much when the prices go up.

Are you saying that housing is elastic or inelastic?

[Ben Kenobi]

Why would prices drop if demand remained the same?

Supply of housing now exceeds the demand. So prices have to come down so that the supply matches the demand.

Right now

Before...

Demand UP

Supply ->

So Prices UP

Now.....

Supply UP

Demand ->

So prices have to go down.

[Spiffor]

Originally posted by Dauphin
Wouldn't matter if you planned to move unless you are downsizing. Market crashes can help upsizing in the same market if you have the cash.

QFT

[Dauphin]

Originally posted by Ben Kenobi


Supply of housing now exceeds the demand. So prices have to come down so that the supply matches the demand.

Right now

Before...

Demand UP

Supply ->

So Prices UP

Now.....

Supply UP

Demand ->

So prices have to go down.

What exactly do you consider the main drivers of demand and supply in the housing market?

[Ben Kenobi]

We've been through this. This crisis is causing a huge slow down in home building. In fact, I'm sure a lot of home builders are going to close up shop before this is all over.

Good. There was an oversupply of houses. This was needed.

[Kontiki]

Wow.

[Ben Kenobi]

Supply? You need the land and the cash for development as well as the materials, including lumber to build the houses.

Since the lumber deal, the prices for the materials have come down, and there have been considerable amounts of housing built, at least in the US.

Demand? I would say demographics is a big one, which is why I was expecting the prices to fall. The houses have been going up and up, until you reach a point where the younger folks cannot afford them.

The usual situation has been younger folks who have been able to buy a house to have their kids, what is happening now, is that there just aren't enough of us young folks to buy up all the houses being sold by the folks who don't want their houses anymore. Hence the oversupply.

[snoopy369]

Housing prices are relatively inelastic with regard to demand, because of myriad other factors that affect them. Wages, the stock market, interest rates, availability of credit, etc. These things are what are currently driving the housing price slump, not supply/demand.

[Dauphin]

Housing is usually income elastic. Those factors you mention (especially wages!) tend to have a big affect on relevant income.

[One_more_turn]

Housing prices are collapsing while the employment is still good. What happens if we get a doubling in unemployment rate, such as the early 90s?

[snoopy369]

Originally posted by Dauphin
Housing is usually income elastic. Those factors you mention (especially wages!) tend to have a big affect on relevant income.

Thanks for making that sound right

I actually should have said that they are relatively inelastic with regard to supply. Demand ~= income, actually, so I suppose they are fairly elastic with regard to demand I'm just tired...