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Why are home sales plummeting?
On the surface, it is because the government's tax-credit for first-time home buyerslapsed in April. It takes a couple of months lag-time between buyer purchase decisions and the actual close of escrow, and so the expiration of the tax-credit is just now hammering the market.
And there is a huge backlog of housing stock.
And sellers are holding out hope that they can get close to peak prices for their homes, while buyers believe that prices will fall further - and so are waiting until prices decline further.
But there is a more fundamental reason that home sales are plummeting.
Specifically, when housing crashed in 2007 and 2008, the government had two choices. It could have:
(1) Tried to artificially prop up housing prices;
or
(2) Created sustainable jobs, broken up the big banks so that they stop driving our economy into a ditch, and restored honesty and trustworthiness to the economy and the financial system. All this would have meant that the economy would recover, and people would have enough money to afford to buy a new house. (See this).
The government opted to try to prop up prices.
Indeed, as I have repeatedly pointed out, the government's entire strategy has been to try to artificially prop up the prices of all types of assets.
For example, I noted in March:
The leading monetary economist told the Wall Street Journal that this was nota liquidity crisis, but an insolvency crisis. She said that Bernanke is fighting the last war, and is taking the wrong approach. Nobel economist Paul Krugman and leading economist James Galbraith agree. They say that the government's attempts to prop up the price of toxic assets no one wants is not helpful.
The Bank for International Settlements – often described as a central bank for central banks (BIS) – slammed the easy credit policy of the Fed and other central banks, the failure to regulate the shadow banking system, "the use of gimmicks and palliatives", and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts "will only make things worse".
***
David Rosenberg [former chief economist for Merrill Lynch] writes:
Our advice to the Obama team would be to create and nurture a fiscal backdrop that tackles this jobs crisis with some permanent solutions rather than recurring populist short-term fiscal goodies that are only inducing households to add to their burdensome debt loads with no long-term multiplier impacts. The problem is not that we have an insufficient number of vehicles on the road or homes on the market; the problem is that we have insufficient labour demand.
Indeed, as I pointed out in April, unemployment is so bad that 1.2 million households have "disappeared", as people move out of their own houses and move in with friends or family.
Why Are Home Sales Plummeting?
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