Existing home sales saw a significant decline month over month and have fallen off a cliff from over 7 million units are year in the summer of 2005. We are at the worst levels since the index was available. Sales are running at about 5 million units annually. There is also a glut of homes on the market at 4.5 million units, so we have almost a year supply not including the new homes that are coming on the market. There are also 2.2 million vacant homes in the US. It is going to take some times to stabilize this market, more than a year if there is not an adjustment in prices to entice new buyers. We do not know how many homes have not even been put on the market because of diminished expectations.
The decline in sales suggests that there is a mismatch between price expectations of buyers and seller. If buyers perceive there will be further price declines they will delay any purchase. Sellers on the other hand do not want to realize a loss or a perceived decline from the high value for their homes.
Sellers are suffering from the full extent of behavioral biases which will cause them to hang onto their homes in the hope that their value anchors will be reached. Inventory and sales will not move until sellers realize that the value of their property has declined and buyers believe that there is no reason to delay their purchase.
The change in perceptions of sellers and buyers for long-term assets which have gone through a large and sustained increase will not happen overnight. Both parties will have to realize that the new equilibrium price level for homes is permanent and not transitory. This housing drag will exist through at least 2008.
Sellers are suffering from the full extent of behavioral biases which will cause them to hang onto their homes in the hope that their value anchors will be reached. Inventory and sales will not move until sellers realize that the value of their property has declined and buyers believe that there is no reason to delay their purchase.
The change in perceptions of sellers and buyers for long-term assets which have gone through a large and sustained increase will not happen overnight. Both parties will have to realize that the new equilibrium price level for homes is permanent and not transitory. This housing drag will exist through at least 2008.
2 comments:
An uptick in the housing sector can only occur if and when:
A) the surfeit inventory of new, unsold homes are,
B) bought by first time home buyers.
Affordabilty, as measured by the price to income ratio has been squeezed by the deposit to income ratio resulting in first time buyers being priced out. Unless there is a return to traditional lending practices, the malaise may persist well beyond the 2008 timeframe.
affordability has to come from prices declining income and savings have been increasing too slowly to have an immediate impact.
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