Business: 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.

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.

Share your thoughts on this story

Read our guidelines for comments

Comments on this article

by sherry	10/29/07 11:20 PM
Values went up. Governments didn't lower millage to offset the growth in revenues. They conducted a massive money grab. Making the market Crash, not slow down. They won't shrink their budgets, so properties lose value to make up for being over-taxed.

by Richard	10/29/07 10:38 PM
One thing no one seems to mention is that many corporations are moving the higher paying jobs out of the State. The only jobs remaining for some companies are the lower paying jobs. The workers who manufacture or handle the product.

by Frank	10/29/07 07:00 PM
The other big reason is that people took Home Equity loans to 100% of the inflated value and they can't sell now and get any kind of down payment out to go towards a next house.

by Sandra	10/29/07 05:28 PM
Sarah the renter - don't kid yourself. Renters pay some of the highest insurance and taxes; they're rolled into your rent. Rentals don't have the benefit of Save Our Homes and landlords pass the extra costs on to you, the consumer.

by John	10/29/07 05:09 PM
I lived in the area for 20 years before moving away. I still own a home there on the water and what I see really scares me. If one bad hurricane goes thru the area you will have to walk away. There will no way to afford the insurance.

by Tim	10/29/07 04:55 PM
LOL $125k house bought.. flipper spends $10k in shoddy "upgrades", attempts to sell for $200k as that is what he read in "Get Rich Quick in RE" book.. house doesn't sell so he "slashes" price by 20% and still no buyers... wonder why?

by ELIZABETH	10/29/07 03:31 PM
It had to come to end as prices were out of control.Builders stopped building affordable houses as they were building for flippers and forgot the wages are low in this area and the homes have become unaffordable to the average person.

by James	10/29/07 03:03 PM
Keith, as Homer Simpson once said, these things you speak of intrigue me - I would like to subscribe to your newsletter.

by jeff	10/29/07 02:38 PM
check out the household incomes of the people who benefitted from these increases.county commissioners,real estate agents. insurance agents.The florida govt pension fund.these all benefit from keeping home prices inflated.

by NR	10/29/07 02:31 PM
James is correct: market dynamics are still in tact... market equilibrium has just shifted dramatically (or rather is returning to reasonable levels). We have a long long way to go.

by Keith	10/29/07 02:00 PM
Some years ago, adjustment in Houston market meant some 250,000 homes selling for 80,000? As a broker in Atlanta, we bought 1.2mil for 600k, and Buckhead condos for "yes" 65k...we speecialized in "Luxury Foreclosures" there, and setting up shop here.

by Keith	10/29/07 01:53 PM
Greed is greed. Does anyone stop to consider that those waiting to take advantage of people who bought at the top of the market are just as greedy as those who profited from the overheated market in the first place?

by DB	10/29/07 01:31 PM
It's the taxes and potential cost of insurance that's stopping anyone from buying in FL. My husband and I wanted to retire to St. Peterburg and bought a condo in anticiatiyon. But our taxes tripled in 2 years. We sold and will look elsewhere now.

by James	10/29/07 01:21 PM
No, supply and demand are still in effect. I am shopping for homes in the $800k-$1M range, but when I see a property "discounted" from $1M to $950k, it is usually a home that sold for $600k three years ago. We have a long, long way to go!

by Jeff	10/29/07 01:19 PM
Market inelasticity sounds like the first turn of a downward spiral. May we use the "R" word yet?

by gerry	10/29/07 12:26 PM
Yep, been here 3 years..the $220K house I almost bought in 2003 sold for $430K in 2005...Now the guy that bought it wants $480K...surrre! Then add taxes and insurance...and oh yeah, havent been able to find a job in Tampa for 3 years...w/BBA and MBA

by Courtney	10/29/07 11:01 AM
My homeowner's insurance went up as well as my taxes in Pasco. My salary didn't go up to match. I think people are being priced out of owning homes because of homeowner's insurance being ridiculous in cost in comparison to other states.

by Jeff	10/29/07 10:14 AM
No doubt real estate overheated, but if you look at the last 20 years I doubt Tampa Bay real estate appreciation has beaten the national average, and it was flat in the late 80's early 90's. I'd say it was about time for some return on investment.

by Zwiepak	10/29/07 09:48 AM
The market inflated so much, people have the nerve to think 20% "below market" is a deal. I'm not even THINKING about touching real estate in this area until we fall to about the 45-50% mark. I'd rather rent than get stuck with a depreciating home.

by Paul	10/29/07 09:37 AM
This is no suprise at all. What goes up, eventually comes down. You know the real estate market is out of control when there are 'Flip this house' shows on TV.

by Sarah	10/29/07 09:34 AM
You took the words right out of my mouth, Kevin. These are the exact reasons why I am still renting - at this point, buying would be throwing my money away on taxes and insurance. Renting is definitely the better option in this market.

by jay	10/29/07 07:41 AM
I agree. Home-sellers have to be prepared to kiss those 100 percent home value increases from '04-05 good-bye before the buyers come off the sidelines. That plus insurance and taxes

by Kevin	10/29/07 02:16 AM
Housing prices and taxes doubled, homeowner's insurance tripled, yet mean household income remained the same. What is not to understand? Because of speculative price hikes, fewer residents can afford houses in Pinellas county. 20% is not enough.

Columns

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.