Our housing market

A quick thought on our housing market:

We have been told that our housing market has stabilized from its bottom. Existing home sales and new home sales are “rebounding” from its lowest level since late 2006. The latest housing start statistics, on the other hand, drop again after a few rises in the past months. Vacancy rate remains very high. Finally, both existing and new house median price remain more or less intact since we claimed the housing market collapse.

So, the first question we need to ask is what defines as housing market stabilization. Should we look at sales volume, housing starts statistics, price, or some kind of weighed measures? If price is the main component of the definition, our housing market has never collapse. The problem I can see in determining the housing market situation with a set of indicators. All these indicators are dynamically linked, especially price and quantity.

Here is what I believe. At the beginning of the “market slowdown”, sales volumes dropped. Sellers, especially those investors/speculators are uncertain about whether the slowdown is real or not. And more importantly, they do not know the slowdown duration. They are willing to wait for a few months without triggering the price adjustment. It is also easy to use seasonality as scapegoat. Winter is the non-peak housing season. Indeed, they have every incentive maintain price rigidity as a way to persuade buyers that there is no slow down at all. Of course, there are some random sellers are really to sell at a lower price, but not the big real estate companies. If their strategy achieved, they should expect buyers will come back to the market in the summer. Sales volume and price will rebound.

From the buyers’ prospective, there are two major concerns. One is will the price dropped in the near future? Two is will the quantity house supply drop too fast? At this moment, seem the first concern dominates. What they are observing now is quantity supply is high, with non-dropping price. What they are waiting to see is if the market rebounds in this coming summer. If the sellers’ strategy wins, buyers are persuaded that there is a “structurally upward shift”. The past few years price jump is permanent. However, if the sales volume did not rebound in the summer, it is very likely that buyers in general believe the house market is indeed in bubble. Seller lost the seasonality scapegoat. The only way sellers can do is to lower the price to liquidate their inventories.

In other words, this summer is the critical moment. Price, if adjusts, should start in this summer.

Can we claim at this moment that housing market has stabilized? I don’t know, but I really don’t think so. In most markets, we do not often see either price or quantity adjustment. It is likely both adjust, just a matter of dynamic behavior.