It is not a surprise that housing sales are way down. The housing bubble burst for a reason and sales are down for a reason. There is a lot of media nonsense about housing (and the economy as a whole) making a slow comeback. Sorry folks. No comeback is happening any time soon.
You simply cannot keep following the economic policies that are currently in place and expect a healthy economy as a result. The same holds true for the housing market.
In an article talking about the new home sales report, the following was written:
Sales of previously occupied homes in the United States fell 27 percent in July, the weakest showing in 15 years, the National Association of Realtors said Tuesday. It was the largest monthly drop in the four decades that records have been kept.
Potential buyers are hesitating because they think home prices still have further to fall. Potential sellers — those with the stomach to put their homes on the market at all, anyway — are reluctant to lower their prices.
“It really is a self-fulfilling prophecy,” said Aaron Zapata, a real estate agent in Brea, Calif. “If all buyers perceive that home prices are coming down, then they will stop making offers — and home prices will come down.”
Economics, Not Self-Fulfilling Prophecy
The media picked up on this article. The ran with the “self-fulfilling prophecy” part. This is nonsense. That is sending false signals to the public to say that. It is not a self-fulfilling prophecy. The reason for poor home sales is economics.
The problem with the housing market was a combination of unwise and highly suspect policies from the government and The Federal Reserve Bank. There are great books outlining the details of the housing crash, but in short here the root causes of failing housing market:
- Easy credit terms
- Bad legislation and regulation like the Community Reinvestment Act. This is where the government, in the name of affordable housing, pressured lenders to give home loans to people who would otherwise not be deemed suitable for a home loan by banks and lending institutions whose business it is to make good loans. Lenders were told to make the loans or be sued for discrimination.
- Artificially low interest rates from The Federal Reserve Bank. The Fed controls the interest rates. It does this to try to stop wild fluctuations exactly like the one started by the housing market. However, artificially low interest rates send false signals to investors. In addition, the low interest rates reduce the incentive to save and provide incentive to spend. The incentive is not provided by the market. It is artificially created by the Fed’s low interest rate policy.
- Lenders made the bad loans to people who couldn’t afford them because of government pressure.
- To alleviate the risk and financial burden placed on the lenders by the government, Fannie Mae and Freddie Mac purchased these bad loans from the housing lenders.
- This created moral hazard and gave incentive to the lenders to make even more bad loans to resell to Fannie & Freddie.
- These bad loans were bundled in with other mortgages and sold as mortgaged back securities because “housing prices always go up”, so even with the risk of the bad home loans, the thinking was that these investments would perform well.
- The easy money and low interest rates, along with the lenders ability to pass the bad loans on to Fannie & Freddie, caused a flood of buyers into the market.
- This is what caused home prices to rise. There was no real healthy demand caused by market forces. It was the result of this combination of unwise policies and malinvestment by the government and The Federal Reserve Bank.
- When the housing market crashed prices started falling back to what their real values were.
- However, the stimulus package and other government intervention into the housing market has stopped the prices of houses from falling to their true market values. Stimulus programs and assistance programs have once again artificially propped up the housing market.
- The Federal Reserve and the government have been been printing and borrowing money like crazy to inject into the housing market. This is not sustainable. At some point the borrowing will have to come to an end. The Federal Reserve cannot keep printing money or it will risk devaluing the dollar so much that the housing problems will look mild.
- When the so-called stimulus money runs dry, the housing market will be forced to face reality. Prices will fall and fall hard.
As you can see, there is good reason for people to believe home prices will continue to fall. They will. The artificial high cannot be maintained forever without creating even bigger economic problems.
Reality: Perception or Prices?
However, let’s look at another statement made in the above quote.
“If all buyers perceive that home prices are coming down, then they will stop making offers — and home prices will come down.”
The premise is that the prices of homes are fine where they are. The argument is that perception alone is tricking potential buyers into thinking prices will drop.
This is silly. The fact is that sufficient demand does not exist to compel people to purchase at current prices. It’s that simple. Buyers buy when they feel like they are getting more value than what they are exchanging in return. If people are holding off in mass until prices drop, it does not mean there has been some brain washing of the pool of prospective buyers. It means prices are too high. As soon as a price drops to a point where buyer feels what he gets is better than what he gives up in return, the sale will take place. Poor housing sales are not a result of self-fulfilling prophecy. Housing sales are suffering because prices need to come down substantially.
