Let' s go back to basic supply and demand. Prices will adjust downward until there is an increase in demand for housing or there is a decrease in the supply.
On the supply side, there are two forces working against each other. On the positive side, there is a slowdown in residential construction. This is not good for GDP because existing home sales does not increase production, but less homes being made will cut the market supply. Unfortunately, foreclosures are still increasing which forces new unintended inventory on the market. Prices will have to fall to clear this higher level. Prices will also fall if foreclosures lead to forced sales by banks at whatever prices the market will bear.
However, the demand side is looking much better as measured by affordability. The decline in median prices relative to disposable income has been so large that we are more affordable in any time since 1968. If you are a first time buyer, you can own a home at a great price level. If you account for declining interest rates, the payment picture is also looking better. Of course, if you want to trade up there is more of a problem with selling the lower priced home. Nevertheless, the demand picture in some parts of the country should look better.
We are moving into different phase of the housing cycle with more differentiation across regions. Those that have been overbuilt and driven up by speculation will continue to be hard hit. Those areas where the economics are changing like Detroit will not recover anytime soon, but areas like Texas are looking firm. The dynamics of the housing bail-out will be more complicated if most of the money will move to the speculative areas of California, Arizona, Nevada and Florida.
On the supply side, there are two forces working against each other. On the positive side, there is a slowdown in residential construction. This is not good for GDP because existing home sales does not increase production, but less homes being made will cut the market supply. Unfortunately, foreclosures are still increasing which forces new unintended inventory on the market. Prices will have to fall to clear this higher level. Prices will also fall if foreclosures lead to forced sales by banks at whatever prices the market will bear.
However, the demand side is looking much better as measured by affordability. The decline in median prices relative to disposable income has been so large that we are more affordable in any time since 1968. If you are a first time buyer, you can own a home at a great price level. If you account for declining interest rates, the payment picture is also looking better. Of course, if you want to trade up there is more of a problem with selling the lower priced home. Nevertheless, the demand picture in some parts of the country should look better.
We are moving into different phase of the housing cycle with more differentiation across regions. Those that have been overbuilt and driven up by speculation will continue to be hard hit. Those areas where the economics are changing like Detroit will not recover anytime soon, but areas like Texas are looking firm. The dynamics of the housing bail-out will be more complicated if most of the money will move to the speculative areas of California, Arizona, Nevada and Florida.
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