U.S. Homeowners Refuse to Cut Home Prices
I follow the housing data from the U.S. pretty slavishly: new home sales, existing home sales, the index of mortgage applications, residential building permits -well, you name it and I have a little graph of it somewhere. Lately, all the little graphs have looked the same, in that they resemble ski hills. Housing activity has fallen off a cliff, which really shouldn’t surprise people, but somehow seems to be a shocker to everyone from small borrowers through to big lenders. But let’s leave that part of it alone for now.
The part that has actually shocked ME is the price part of it. That is, home sales are down like a third since last summer, but prices are just not down that much. The Case-Shiller housing index (which looks at about twenty cities across the U.S.) has fallen by about 11% year over year, and other measures show much more muted declines. Huh? Doesn’t basic economics tell us that when demand falls, price adjusts?
Forget economics: housing is a emotional investment if there ever was one. That’s the gist of an article in today’s New York Times, and it hits some important points. As economics writer David Leonhardt details, people basically refuse to believe that their house is worth any less than they paid for it, or than it was worth at the peak. They’d rather hold on–and not sell–than slash the price.
I’d go further than the article though, and say that there is a lot of desperation in the stickiness of home prices this time around. For many baby boomers, and pre-boomers their house was their ace-in-the-hole when it came to retirement. No way can they say good bye to hundreds of thousands of dollars in appreciation–even if it no longer really exists anymore. And so they wait. And wait. And wait some more.
Prices will eventually go down more - but we may see some plateaus before we hit the next big drop.
