The housing market works pathologically

Monday, September 29th, 2008

The housing market works pathologically, Edward Leamer notes:

A normal market works because demand curves are downward sloping, but for homes demand curves can be upward sloping. Declining prices in many regions are not bringing buyers back to the market. Price declines are creating the expectation of more price declines to come, and encouraging prospective buyers to postpone their decisions, which causes more price declines, and eventually overshooting of prices. When prices get back to normal and buyers have not returned, that’s when we need to find ways to bring the buyers back.

(Hat tip to Art De Vany.)

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