Wednesday, March 05, 2008

Housing Demand

Today Robert Samuelson assures us that there is no oversupply of housing - it's just that there's not enough demand. And that, he's confident, will stop being a problem as soon as housing prices drop "to a level where housing can escape its present stagnation".
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.
If we have a few million customers, that's true. If we have 1,000 customers, that may be true. If we have one customer, cutting the price per apple to a penny probably won't convince the customer to buy them all, save perhaps if he owns a cider mill. But that's an aside from Samuelson's argument - yes, if you cut prices low enough, you will find buyers for all homes presently on the market. If Toll Brothers started selling McMansions for $1, the demand would outstrip anything they could reasonably supply.

Samuelson is correct that, as exemplified by the guy building the huge house in his neighborhood, there remains demand for housing and even for McMansions. But isn't there a bit more than that to the picture?

Builders want their profits - and some may go bankrupt or go out of business if they immediately cut prices to the point where supply and demand curves cross. Lenders who have foreclosed on houses want to cut their losses. Homeowners who are upside-down on their mortgages don't want to have to pay back the difference when they sell their homes, or hope to stay in their homes until they can find a buyer who will pay what their house is "really worth". A lot of people who aren't upside-down still want to hold onto their homes until they can get what it's "really worth". Oversupply in some pockets of the nation is real - where high-end houses were being snapped up by speculators, not by people intending to make the houses their homes, and few people presently even qualify to buy the homes.

I don't argue with Samuelson's belief that the sooner all of this shakes out, the sooner "housing can escape its present stagnation".
The understandable impulse to minimize foreclosures should not be a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today's homeowners makes little sense if it penalizes tomorrow's homeowners. An unstoppable free-fall of prices seems unlikely. Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices.
The problem for the economy and housing market is, with or without intervention, that process is likely to occur over a period of years.

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