Why Is The Market Going Down?

I'm sure you’ve heard the smart-aleck answer to the question: “Why is the market going down?” Some self-anointed expert calls out, “More sellers than buyers.”

Factually this is incorrect as are so many other things you’ve been told. Markets move not because of the quantity of buyers or sellers, but the urgency with which buyers or sellers adjust the price at which they are willing to buy or sell.

The best example of this is today’s housing market. It is not a housing bear market (yet). Prices are not significantly going down (yet). They are mostly going sideways, having leveled off after a remarkable price appreciation. There is, however, way more sellers than buyers if you believe the inventory numbers, and length of time on the market, of unsold properties. Since home owners are not motivated sellers (yet), they are staying on their offer and the price has stayed relatively unchanged – a few reductions here and there. Often such conditions can work themselves out over time if buyers gradually take up the excess supply (even if it takes years).

This is still a nightmare scenario for the homebuilding industry, but there’s no escape for them anyway. The big question for the economy is what makes people content with “hanging out” on their offer, without feeling the need to hit the “sell now button?”

As long as there is no perceived urgency to turn the house or property into cash, which can then be turned into food, or fund other perceived necessities that refinancing will no longer accomplish, most people will keep their hands away from the “sell now button.”

If consumers start having liquidity problems, then it could be lights out for second home prices, which in turn would be damaging to primary residence prices and slam the door on land speculation – not to mention a lot of other things associated with the “wealth effect.” I don’t know what would tip us in that direction, but I’m not excited to find out.

Keep in mind that a large portion of the current economic recovery has been funded by “found money” from mortgage refinancing - money (untaxed disposable income) that was not earned. With interest rates rising, flat-to-slightly declining real estate prices, speculators less confident of their ability to “flip” properties, and mortgage refinancing reduced to a trickle, personal consumption expenditures should begin to slow measurably by the end of the year and through 2007. There is even a chance that real estate speculators will become the first domino to fall as they hit the “sell now button” in order to cover their leveraged indebtedness.

We may be in the final three minutes of the fourth quarter of the championship game. I’m glad I’m in the bleachers and not betting on the outcome.

Red State Patriot

Posted June 21, 2006 07:55 PM
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