This blasphemous statement flies in the face of conventional wisdom, and differs from what you may hear from groups with deep ties to the housing market, which includes the government.
Skeptics of my statement will make the following arguments:
- Home prices are down considerably from 2005-2007 levels nationwide
- Interest rates are low, which makes financing more affordable
- When the economy improves, home prices will rebound substantially
- Owning a home is a good long-term investment
While many of these points are valid on their own merit, it is imperative to look deeper by factoring in macroeconomic trends, supply and demand in the housing market, income growth, geography, home financing, property taxes, insurance, maintenance costs, and inflation.
After carefully weighing these issues, I believe home prices in most regions will (and should) drop further. Some people believe that home prices should not be allowed to fall further, and massive government intervention is necessary to prevent that from happening – while I contend that the sooner we reach a legitimate equilibrium, the better.
The following illustrative exhibit shows an artificial price floor (red line at $400k) that is higher than the natural equilibrium (where supply [blue] and demand [green] lines meet at $250k). In my view, the current approach is delaying the inevitable, and the housing market will only make a full recovery once we reach pricing levels where the supply of homes for sale equals the demand of homes to purchase.
Source: http://blogs.reuters.com/rolfe-winkler/
Many future blog posts will analyze these issues and how they affect us all – whether or not you're a homeowner.
OK, so how exactly is the fed propping up home prices? Are they buying up the houses directly? Instituting a legal price floor? One major component of your analysis that is lacking is that prices not only reflect current demand, but expected future demand, this is especially true for a durable good. Current demand may not justify current home prices but those owning those assets may correctly assume that in say two years time unemployment will be down, more people will have the money to be in the market for a home and demand will go up, this future demand and the price owners expect to get in the future may be their justification for refusing to sell at lower prices. Which would be a rational individual decision by each owner/investor not some shady backroom conspiracy by the fed.
ReplyDeleteI agree 100%!
ReplyDeleteCheck out my empirical approach - simply observing the Case-Shiller index:
http://blog.mapthatpad.com/schiller-index-will-it-ever-go-back-down