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The Paradox Of Housing

Via the Wall Street Journal's excellent Real Time Economics blog, I see that the latest iteration of the Financial Trust Index shows some increased optimism about the housing market:

The percentage of people who think house prices in their area will decrease in the next year has dropped to 26 percent in June 2009, from 37 percent in March and 47 percent in December 2008.

“In only six months we’ve seen marked improvement in confidence toward home values. In fact, 75 percent of the people who changed their opinion during this time period now think house prices will remain stable, while the remaining fourth think house prices will rise,” said Sapienza.

Should be good news, right? Well maybe, maybe not. If a lot of the people changing their opinions are homeowners, then I'd guess this will be pretty self-defeating. According to a recent analysis by Goldman Sachs, we have somewhere between 2.5 and 4.5 years of excess housing inventory floating around now. Of course, excess supply usually gets worked off when sellers lower their prices. In the case of housing, this would seem to require a substantial amount of gloominess, since homeowners are very resistant to cutting prices even under lousy circumstances. But if owners increasingly think prices will be stable or rising, they have even less of an incentive to cut their asking price, which will further prolong the period of excess supply and delay a recovery. So, perhaps paradoxically, this strikes me as bad news.

P.S. Unfortunately, the survey doesn't indicate what fraction of respondents are homeowners. It's possible that everyone who now thinks housing prices will be flat or rising is a prospective buyer (or not involved in the housing market at all). But, given what we know about homeowner self-delusion, this strikes me as unlikely.

--Noam Scheiber