Econ 101 Applied to Existing Homes
Econ 101 tells us that when supply exceeds demand ex ante, the price will weaken. The existing home market exemplifies this tenet. In June, existing single-family homes for sale were up 35.7% vs. year-ago. Existing single-family homes actually sold were down 6.5% vs. year ago. So, the June year-over-year "excess" supply of existing single-family homes was 42.2% (35.7 minus -6.5), just off a record high excess supply of 45.1% set back in April (see Chart 1). Back in June 2005, the excess supply of existing single-family homes was only 6%. And back in June 2005, the year-over-year change in the median price of an existing single-family home was 13.5%. As the supply of homes for sale has grown relative to the demand for them, the rate of price appreciation has slowed to only 1.1% in June 2006. Chart 2 shows comparable data for existing condos/coops. In June 2005, the excess supply of condos was about 40%, on its way up to 74% in June 2006. In June 2005, the median price of an existing condo was up 13.9% year-over-year. In June 2006, the median condo price had fallen 2.1%.
Chart 1
Existing Single-Family Homes: Excess Supply* vs. Median Price**
* y/y % chg. in homes for sale minus y/y % chg. sold
** y/y % chg. in median price
Chart 2
Existing Condos/Coops: Excess Supply* vs. Median Price**
* y/y % chg. in condos/coops for sale minus y/y % chg. sold
** y/y % chg. in median price
In the months ahead, Econ 101 predicts that the prices of existing dwellings will continue to soften. This will serve to reduce the excess supply as some not-so-serious sellers take their homes off the market and as those sellers who have to sell acquiesce to the reality of lower prices. The knock-on effects of all this will be subdued consumer discretionary spending as those "home ATMs" are not refilling as rapidly as before. Another factor that will curtail consumer discretionary spending is slower income growth in housing-related industries as employment and sales commissions moderate further. I said it last week and I will say it again - the residential real estate sector has entered a recession. Whether the economy as a whole enters a recession early next year depends on how severe the housing recession gets. Further Fed interest rate increases can only increase the depth of the current housing recession and geometrically increase the odds of an economy-wide recession.
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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