Tuesday, July 20, 2010

What Does Excess Supply Look Like?

Home construction in June was the lowest it has been since October, and Homebuilders confidence in the housing market has reached its lowest level in a year. The government has tried for two years to prop up the prices of houses and what does it have to show for it? The persistence of what we in the economics profession call excess supply.

Those hoping for a turnaround in the housing market may be waiting for a long time. A report written by Dhaval Joshi and excerpted by Barry Ritholtz documents why the housing market is still in its depressed shape and why it may take a long time for it to recover.

  • 24% of all home mortgages are underwater, meaning owners owe more than their house is worth.
  • Between 2002 and 2006, contractors built 12 million new homes while the number of households went up by just 7 million
    The bottom line is that there are still way more houses for sale than there are buyers at current prices. Credit expansion by the Federal Reserve and other interventionist measures promoting home ownership last decade created a housing bubble that still has air in it. With an excess supply of such magnitude, there is no place for market prices to go but down. Prices must fall for the market to clear and the housing slump to finally be abated. Any efforts of the Federal Reserve or the Obama Administration to forestall the market clearing process, may appear to work temporarily, but merely prolong the agony and delay the adjustments required for our economy to get back to a more sure footing.

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