Home Prices Fall Slowly. But Why?

I just read an incredible article entitled “Why Home Prices May Keep Falling” published by the New York Times. It describes, in pretty good detail, why home prices fall, and fall slowly. The most interesting part of the article is when the author describes the points of view held by a buyer in a market like this, and a seller in a market like this.

Imagine a young couple now renting an apartment. A few years ago, they were toying with the idea of buying a house, but seeing unemployment all around them and the turmoil in the housing market, they have changed their thinking: they have decided to remain renters. They may not revisit that decision for some years. It is settled in their minds for now.

On the other hand, an elderly couple who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it’s finally the time to do so. It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again.

As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply — and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011.

All of these people could be made to change their plans if a sharp improvement in the economy got their attention. The young couple could change their minds and decide to buy next year, and the elderly couple could decide to further postpone their selling. That would leave us with a buyer and no seller, providing an upward kick to the market price.

A lot of it comes down to how people think, and what they think of their specific situation in this specific economy. Once a buyer has made a decision, that buyer will likely stick by his decision until some major shift in the economy occurs. Same for sellers.

Home prices fall slowly (and rise slowly) because of reactions to these types of changes. It makes complete sense. Prices and interest rates start to drop, so buyers start looking for a new place, and sellers decide to sell before its “too late” and also so they can “move up” in a more cost effective way.

Now the question remains… when are home prices going to rise again? The answer: only time will tell.

About Lisa Oates

Lisa is the creative mind behind The Harrisonburg Homes Team, providing streamlined content management, quality authorship, and graphic design for Harrisonblog. She's passionate about blogging, enjoying life, and a good cup of coffee.