Housing market

A while ago I mentioned that I am not as bullish as the market regarding the housing stabilization. I argued that in most market, price and quantity are both needed to adjust when there is a drop in demand. In some sense, the short run supply of house is relatively inelastic. Price adjustment will follow the sales adjustment.

Here is a bit of thought on the economy as a whole. So far, the weak housing market did not (yet) spilled over into other components of the economy. Private consumption remains high. One explanation is that housing market is quite localized. The collapse in sales in Florida will not cause much private consumption impact in the Bay Area. But when the government measures private consumption for the country, it looks at both Florida and the Bay Area. The impact of housing market collapse will not be one to one to the overall private consumption.

Now, the problem seems different. Thanks to our financial engineering technology, the securitization of mortgage loan makes every part of the country exposes to the housing market. Investors everywhere in the country are now able to expose to the risk of the local housing market through the exposure of stock market. Our private consumption is fine as long as stock markets hold up.

I would guess this is the reason why Greenspan mentioned that spill over is possible until recently.