Housing Cannot Catch a Break – First Too Many Houses for Sale; Now Too Few Houses for Sale

And Yet Prices Decline

In the United States a major cause of the current economic unpleasantness is the collapse of the housing market.  House prices are down, way down.  This means people who need to sell their houses to move to a new job cannot do so.  This means people who need to borrow money to purchase goods and services cannot use their houses as collateral.  This means that people whose mortgages are higher than their market value and who cannot afford to make payments cannot refinance.  The means that people who cannot refinance are walking away from their homes, allowing foreclosure and putting even more houses into a bloated marketplace.

Except the bloated marketplace does not seem to be the situation.  In fact the supply of houses on the market is down, way down.

                                     There were more than 2.19 million homes listed for sale at the end of September, down 20% from a year earlier, according to a new report from the real-estate website Realtor.com. That is the lowest level since the company began its count in 2007.

So this should be good news.  But it is not.

While falling inventories are typically a sign of health, because reduced competition can boost prices, that isn't the case right now.

Instead, real-estate agents say, people are pulling their homes off the market rather than try to sell them at today's discounted prices. At the same time, banks have been more slowly moving to take back properties through foreclosure ever since processing irregularities surfaced last fall, temporarily reducing the supply of foreclosed properties. The shrinking supply isn't driving up prices because demand is soft.

See,  demand is what is important, demand drives the economy, and right now even though the price of housing is down, home sales are not taking place because there is a lack of demand.

Where does demand come from in an economy in a stall?  It comes from increased government spending.  And just because Conservatives don’t believe it doesn’t make it any less true. 

Actually, this is good news.  Before the housing market can recover and new construction can take place which will drive economic growth, the supply of existing housing has to decline relative to demand.  What we are seeing is the first stage in the recovery process.  The second stage, when housing prices start to rise and new construction starts to take place in response to higher demand may or may not come anytime soon.  But it cannot come until this first stage is completed, so the fact that this is underway is some cause for hope.