Monday, September 24, 2007

The housing market and macroeconomics

This is a good NY times article on the housing market. Click here .

The jist of it is this paragraph.

“The buyers and the sellers are the same people in this market,” Professor Mayer said. “So if the sellers price so high that they, effectively, put themselves out of the market, it shows up on the buying side, too.”
He notes that economists at the Federal Reserve and elsewhere keep close tabs on this kind of behavior because the purchases of durable goods like furniture, appliances and televisions tend to run hand in hand with home purchases — and durables have a disproportionate influence on the business cycle. Further, because the freezing of the housing market makes it harder for people to move, it reduces the likelihood that they can quickly relocate for higher-paying jobs. Dysfunction in the housing market can spill over into the job market, too."

The idea is that sellers do not want to accept a price loss on their home. So they price their homes too high for demanders to buy (a surplus). Since the housing market is "illiquid," it takes a long time for them to accept the fact they made a bad investment, lower the price and cut their losses.

However, this has "macro" economic implications in the sense that people buy furniture and other durable goods when they move into a new home. So sales of those products suffer (demand shifts left/down). Further, sometimes these people are so irrational that they refuse to sell their home even though it means they have to turn down a higher paying job. So the job market suffers due to a shortage of workers.