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Lower prices not boosting housing market

Home sellers are tossing confetti, waving banners and dishing out discounts. But lower prices aren't translating into stronger home sales.

By James Thorner, Times Staff Writer
Published October 29, 2007

Home sellers are tossing confetti, waving banners and dishing out discounts. But lower prices aren't translating into stronger home sales.

Blame whatever forces you like - skinflint banks, negative press coverage, foreclosure fears - but the law of supply and demand seems to be on hiatus.

At the risk of getting into an economics lecture, something odd is happening. Prices are falling, up to 20 percent in certain Tampa Bay area neighborhoods, but demand is dropping. That's the message from the September home sales numbers released last week.

Economists call such a scenario price inelasticity. It means buyers aren't responding to the stimulation of lower prices.

The classic example of price inelasticity in the other direction is gasoline. Demand runs strong even as gas prices double from $1.50 to $3 per gallon.

In an elastic market - think shoppers descending on blouses marked 80 percent off - low prices should signal a sellout.

This inelastic housing market is wreaking havoc not just on individual sellers in our area, but on the big builders holding all sorts of close-out sales on their new home inventory.

I almost gagged on my breakfast bagel last week when I read the size of Pulte Home's loss. It was nearly $800-million, and that was just over three months. For the year, Pulte will join the billion-dollar-bust club.

Pulte let it slip that in some areas "price is not moving product a lot." It said new home orders fell 37 percent this summer, despite discounts galore.

Banks seem to be the immediate cause of September's unresponsive housing market. They're much pickier about whom they lend to. But can you blame them? According to the Wall Street Journal, Tampa, Orlando and San Diego showed the biggest rise in delinquent loans, otherwise known as missed mortgage payments.

If price isn't always decisive in this business climate, how can a bargain priced home sell? All is not lost: Clean, well advertised, well-located homes tend to outperform the market. In an era of inelasticity, sellers have to twist with the times.

James Thorner can be reached at thorner@sptimes.com or 813 226-3313. Read his (Un)Real Estate blog at blogs.tampabay.com/realestate.

[Last modified October 26, 2007, 21:56:23]