In Economics 101 students learn that markets are driven by demand and not supply. The Bush/Paulson plan addresses supply and assuming that the plan gets off the ground it will only address supply at the margin. This is not anyone’s fault. The pill that is required to fix the housing market will have to be swallowed in parts over time. The market is not willing to admit at this point how severe the problems are.
Back to demand. The demand for housing is broken up into parts:
1. subprime demand, once estimated to be about 20% of the market, basically no longer exists. They can’t get the financing.
2. The Alt. A group may also want to buy a home, but they can no longer obtain financing.
3. There are a few investors, but they have to have their own sources of financing.
4. That leaves only the prime borrower, defined as someone with the credit history, income, and down payment necessary to get a mortgage that can be sold to Fannie Mae and Freddie Mac (agency paper in the language of the “biz”).
These people fall into two groups: a) those that are will buy a home at or near current market prices. This is where most of the housing demand is coming from at this point. I call this group the “oblivious” group, because they are oblivious to the current market conditions and just want a home. People have a variety of legitimate reasons for buying a home, but in these times a “romantic” notion of home ownership based on thinking of the early and mid 20th century just may be obsolete.
The second group of prime buyers b) is very cognizant of the market conditions and are sitting on the sidelines waiting for the price of homes to fall more. My guess is, this second group of prime buyers is slowly growing larger at the expense of the “oblivious” group.
With all that said the housing market goes no where until demand increases. Demand will not increase until the price of existing homes decreases (forget new homes it is only 15% of the housing market) and the second group of buyers believes that we have hit the bottom. They will not believe that we have hit bottom until the housing inventory number starts to decline. If you will notice there are no comments about interest rates, they are not material.
Implodemeter 12/09/07
