March 25, 2006

Posting for NAR Economist David Lereah on supply and demand (he obviously missed this class)

We're in an oversupply stage now, as demand quickly contracts, and prices haven't fallen (enough) as homeowners and developers remain stubborn - hoping against hope to find an ignorant buyer at an unjustified price. In addition, builders are pumping out homes into the oversupply situation, at exactly the wrong time - they're not needed.

So guess what, David Lereah? You got it big guy - prices will contract, and new supply will either contract, or prices will subside even faster.

Supply and Demand: Effects of being away from the equilibrium point

Now assume that individual firms have the ability to alter the quantities supplied and the price they are willing to accept, and consumers have the ability to alter the quantities that they demand and the amount they are willing to pay. Businesses and consumers will respond by adjusting their price (and quantity) levels and this will eventually restore the quantity and the price to the equilibrium.

In the case of too high a price and oversupply (seen in the diagram at the left), the profit-maximizing businesses will soon have too much excess inventory, so they will lower prices (from P1 to P) to reduce this. Quantity supplied will be reduced from Qs to Q and the oversupply will be eliminated.

86 comments:

Dogcrap Green said...

You supply and demand thory is not so much wrong. I think we will soon see a massive glut of houses in the vinal siding suburbia sprawl.

But I do not agree that builders are building at the wrong time.

They are no more building a the wrong time now. than they were building at the wrong time in the early seventies.

Back in the seventies a massive glut of homes did appear - IN THE CITIES - as people move into the suburbian sprawl that was being born.

Today my largest project Im working on is a Toll Brother's bid. They are building luxary homes next door to land owned by the National Park system. Another project I was looking at was the invention of a resort town out of commuting range of DC on the Potomac and near the Bay. The developer was taking a sleepy quite town and dreging the river to make rome for 50 foot yachts, building a state of the art golf course, and 200 multi-million dollar house, plus trendy shops and restrauants.

Just as we seen people flee the cities to the sprawl I think it is now time to see them flee the sprawl to the country, the country club, the beach, the mountains, and so on.

Each year millions more Americans with money are not tied down to living close to work. The baby-boomers first wave have just turned 60. Some are retiring early creating this new boom of construction. Others will soon following.

Will their fleeing of urban sprawl pull the rug out of home prices in many market? Hell yes. But this is not where the builders are now playing ball.

Anonymous said...

Dog Crap Green, who's got one of the strangest and most creative handles in blogland, has a good point. Even in a falling market, you can have secular demand shifts of this kind. This could help city- and suburb-dwellers even more in the years to come.

ecobuilder said...

Dogcrap green,
Don't forget a gas price. In case gas price of $8-10 per gallon all remote resort locations will turn into abandoned places. I would bet on private companies building prisons and concentration camps ;-}}

Dogcrap Green said...

The Eastern Shore of Maryland, The Southern tip of Maryland, and West Virginia is where the houses are being built now.

Gas price is irrelavent when you are retire.

Folks are buying here because it is cheap, yet close enough to see the grand kids on the weekend with a short 2 hour drive. But the 2 hour drive obviously is not commuting to work distance, besides with DC traffic that 2 hours would be 3 1/2 during the rush hour.

With regard to helping city dwellers. I assume you mean buying in the future. I disagree and this is why I moved to the inner city Baltimore. We have no baby boomers here. They all left years ago to join the urban sprawl. Folks in the city are either under 45 or over 65 all ready. Anybody over 65 and still here, plans on dying here.

Even in DC where the housing bubble is fast deflating. The inner city of DC is actually appreciating in value. Though if you are white I would not recommend living there. The ministers all preach hate to their black congergation. And thy are the most racist Americans. Don't believe me. Try getting waited on at Denny's - not until every black person has been served will you get to eat. Go to a fast food place. If the black person behind you order a cheesburger and there is only one in the bin. He eats while you wait for them to cook another - God only knows what they did to that burger. And only in DC would the majority tell the minority that their childern has to go to a school named after a man the promoted hate and violence toward those who had the wrong skin color.- Malcom X Middle School.

Anonymous said...

i love the demostration in LA and such. Its just the beginning of future problems this country will deal with when all the different people cannot get along. The south american have taken over and are not just doing labor jobs and the middle class is eroding. Alot of people think there middle class with 0 savings and interest only loans, new car etc. In the bay area you were able to get a 80,000 tech job but those jobs are going to people from india etc for half that, in socal you could be a bank manager and own a house ,no more, in many places in this country people from other country are willing to work for less and have less so the upper management and business owners can have not just a primary and vacation home but multiple homes and be super rich. So you better be the owner or upper management or government worker(entitlements), because the middle is in trouble with low savings and huge debt.

moman said...

dogcrap - that's an interesting perspective that I believe holds some weight.

I do NOT belive that retirees are immune from rising gas price - many of those people are worried about outliving their $$ so I would expect energy/hosuing costs to be a larger share of concerns than in the past.

The exurbs won't have a lot lot of desire in the future either. What kind of clown wants to live where every house looks the same? There just isn't any good business rationale that supports living in the exurbs with high energy prices.

Anonymous said...

Dogcrap green- I love the way you can always offer that alternate spin on things, even when I don't always agree with you. This time I do and don't.
You are soooo right that there is never a bad time to build, just bad locations (that maybe used to be great locations.)
The experienced homebuilder knows this and adjusts his sights accordingly.
I live in the country,lots of cheap(maybe I should say reasonable)land around here, always lots of building this time of year in the residentially zoned areas,although they are getting less and less with each passing year. The working people that move here (an hour above Baltimore) have nice places built by local small contractors,the type that put up maybe one or two houses a year and don't scrimp on quality. The new owners have good jobs, and they can afford the houses and the commutes.
You are wrong about that gas thing,however. As a retiree, I worry about fuel prices just like everybody else. I am on a fixed income, admittedly a very good fixed income, but fixed all the same. Sure I don't have the daily
commute anymore, but its still a pain in the wallet to fill that tank, even getting 30 mpg.
And short hauls to the grocers,doctors, etc, use up more miles per gallon than open road travel, minus the rush hour stop and go.
Moman said the many retirees are worried about outliving their $$, and I couldn't agree more.
Fuel is not the only thing going up while their income remains the same! And with the coming downturn in the economy,which I believe will happen, its going to get rough getting by with less and less for you, and more and more for everybody with their hand out ( retail prices,services,fuel,taxes.)

Dogcrap Green said...

I do NOT belive that retirees are immune from rising gas price - many of those people are worried about outliving their $$ so I would expect energy/hosuing costs to be a larger share of concerns than in the past.

I agree about energy cost being a concern, and so does Toll Brothers. I was refering to gasoline/commuting cost. The size of the house and the cost to heat it has been on the radar screen over at Toll Brothers. People still want to say the live in a house they don't need, I suspect this will change though. I myself hate paying those heating bills for three empty bedrooms. That extra $100 I spend per month to heat my house is equal to $10,000 more worth of land I could have bought.

With regard to an alternate view. I simply believe home builders are a great bargin. The house in the suburbs are over priced. Rural land is a great investment, and the inner city is a shelter from the housing bubble if you need to live near a metroplitan area. I see gold crashing in value, the US dollar climbing in value, and I am confused by energy prices varying so much from their base commodity price of a barrel of oil (supposily this is 66% of the cost to produce desiel, yet desiel doubled when oil rosed 33%).

I like this blog because I see Kieth as some what right and some what wrong. He is keeps me in touch with the "alternative view". I don't believe I simply argue the alternative to Kieth. My views have been pretty consistent. we just see things about different of how the fallout will impact the economy.

moman said...

Dograp - couldn't agree more but I differ slightly in rural land. I see a mass exodus out of the exurbs closer into the cities as energy costs soar.

Never really understood why someone would pay $200-300 more a month for energy to power a 4-bedroom house for 2 people and never understood why someone would drive a Suburban for a single person because they may need to haul people around....I prefer my two-door sports car because I always get out of being the driver when a group goes out!

Good luck with your retirement anon.

Dogcrap Green said...

On my blog I have an article I re-posted regrding the record run on farm land apprciation last year. Though past performance doesn't mean future gains. It seem to me the rural land is starting to take off as people begin to fear and see the housing bubble in the suburbs.

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