Wednesday, May 6, 2009

More Supply Equals Lower Prices

Economics 101 people.  I just heard a financial reporter, Diana Olick of CNBC, say that housing prices will rise when more people start putting their home on the market.

To give context, the discussion was around the Zillow report saying that over 20% of homehowers are underwater.   The numbers might be even worse than this because there is a large "shadow inventory" of homes.  That is, there are a number of people, over 1/3 of homeowners, who wish to sell their home but have held off over the last few years for fear of owing more than their house is worth.

Olick pointed out that the sales number may be artifically low because the only thing that is selling are foreclosed homes and people who must sell.  She argues that when more of these non-distressed people put their home on the market prices will rise becasue these people will not sell their homes at the low prices.

Umm, no.  Prices are set by a confluence of supply and demand.  Suppliers do not just get to set whatever price they want.  They may wish for prices to be at a certain level, they may certainly not sell at a price they deem too low, but I can promise you prices will not rise because there is MORE supply.  It makes no sense.  I may want to sell my car at $20,000 even though it is worth about $10,000.  I may refuse to sell if I can't get $20,000 for it.  But that just means my asks will not affect the market even more.  And I promise you my bringing my home to the market will actually depress prices as buyers will feel they have a wealth of choices.

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