This week, many US news agencies reported that home sales are down, prices are weakening, and it's all deeply confusing. Since interest rates are falling, shouldn't home sales be rising? Isn't that what Economics 101 teaches us?
Pundits give many possible reasons for this strangely low level of sales: lack of available credit, bad seasonal weather, weak consumer confidence, weak jobs outlook, tough mortgage lending standards, and more. I believe all of these excuses are nonsense.
Banks are willing to lend, and have the cash to do so. Consumers have the highest credit ratings they have had in years. And, bad weather doesn't account for nationwide weakness.
The reason US home sales are low is because people with excellent credit and good jobs simply have no reason to buy. This explanation is far too simple for economists to embrace, yet it is true. Take, for instance, the conversation I heard on Friday:
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Banker: "I haven't seen you in a while. Did you buy that property in Phoenix you were looking at?"
Client: "No, not yet. Prices are great down there! But, they're not going up. I heard on the news they might still be dropping. I don't think there's any rush. I think I'll just sit tight."
Banker: "I agree."
Client: "The prices sure are great, though."
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I hear conversations like this every day.
Thousands of investors are waiting to "jump in," but there is simply no incentive to buy right now.
At some point, of course, prices will take off like a rocket ship - that is, slowly at first, gaining momentum steadily (once people realize prices are rising again) until going at full speed. However, no one knows when that point will be. It could be years.
Strangely, and counter-intuitively, I believe that in order to spur home purchases, the Fed should do exactly the opposite of what it is doing. That is, it should steadily increase interest rates. Last year, when the Bank of Canada announced that it would be raising rates, there was a frenzy of buying activity (which has since slowed, since they are now lowering rates). Contrary to every economics paper every written, I think the reality of rising rates would kick-start a home buying recovery.
In any case, my advice (as I have pointed out previously), is that if you want to buy real estate and are able to do so, do it now. Interest rates are extremely low, prices are extremely low, and with a large number of homes on the market you can choose whichever property your heart desires. Buying at a time like this will never be a bad investment.
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"Space is big. You just won't believe how vastly, hugely, mind-bogglingly big it is. I mean, you may think it's a long way down the road to the drug store, but that's just peanuts compared to space."
Douglas Adams
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See also:
If Mortgage Rates Keep Falling, Why Are Home Sales So Bad?
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