Tuesday, October 7, 2008

Our Problem is a Demand, Not a Supply Problem

There has been a lot of discussion lately about what it will take to firm up the real estate market and put a bottom under the prices. Most of the discussion has been centered on the supply side of the market, with the talk centered on how to help people who are behind on their mortgages stay in their homes so those homes don't add to the supply in the market.

No doubt such an approach would take some homes off the market and prevent others from going on the market. However, foreclosed properties and those in pre-forclosure make up a relatively small precentage of all the homes currently for sale.

We do have too many homes for sale relative to the demand, but the fact remains that the number of single family homes listed for sale in Momouth County this year is about 10% less than last year for the same time period. In spite of this, the inventory levels are higher than last year.

Why is this the case? The number of homes being bought is declining at an even faster rate. Although the number of new listings has declined, the number of new sales has declined even more, resulting in an even greater oversupply in 2008.

What can we do to firm up the market? One is to let the market cycle run it's course. Ultimately prices will decline enough that "experts" who have the ability to influence large numbers of people will send out a "buy" signal which will bring people into the market. That approach will take care of things but will probably take a lot longer than most people wouldl like.

The other is to try to interrupt the normal business cycle. Helping people stay in their homes is an attempt to do that. So far, the results have been minimal. A better approach would be to stimulate demand. Right now, people are hesitant to purchase real estate because they see more risk than return. To stimulate demand, we would have to change that equation by creating an upside to purchasing where people don't currently see one.

How might that be done? The only thing that government can to stimulate demand is through incentives. What might they be? The only thing I can come up with are tax incentives for purchasing real estate. If the tax incentives were great enough, people would see enough upside to purchasing that the risk would be worth it. With sufficient incentives, demand would go up and the excess inventory would soon dry up and prices would find a floor. That is what everyone is says we need.

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