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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, March 2, 2008 Hope could resurface soon in housing market By James McCusker When will this housing slump end? Maybe sooner than we think, and certainly sooner than we deserve, given how we have dealt with it. The most encouraging sign so far this year has come from Florida. But to get a useful perspective on that piece of news, it is probably wise, if not exactly fun, to wade through some economics first. Economics involves people's behavior and you know how that goes. Things that should be very simple can get complicated in a hurry. The housing market is no exception. No two things in economics are simpler or more fundamental than the law of demand and the law of supply. When we talk of these two laws, we most often lump them together as one, single "law of supply and demand." The law: as the price of something goes up, sellers put more of it on the market but buyers want less of it. And as the price goes down, buyers want more but sellers are turned off and offer fewer for sale. This makes simple, common sense, and we all get it. But then, wouldn't you know, it starts to get complicated. It turns out that the price of something isn't the only factor in supply and demand. The demand for some things, for example, is affected strongly by the buyer's income. In fact, for some goods, income can be a bigger factor than price. Economists measure how responsive demand is to changes in price with something called "price elasticity," while the effect of income on demand is called, naturally, "income elasticity." And of course when you mix the two together you get "cross elasticity" and the next thing you know there are equations, symbols and Greek letters flying around every which way. It's like a family get-together that starts out very simply with, "Let's have your sister, Melinda, over for Thanksgiving dinner this year," and quickly becomes so complicated that escape and evasion plans begin to form in your head. The housing market has all of these complications, plus a few others. First, there are elements of what are known as "inferior goods" in the housing market. An inferior good is one for which demand goes down as income goes up. For most people in the housing market, for example, your desire to rent a trailer as your principal residence declines as your income goes up. More generally, the demand for renting any sort of residence tends to decline with income. In addition to the inferior goods issue, the housing market also has some structural rigidities that slow down or get in the way of balancing supply and demand. The first is that in the short run, supply is pretty much fixed. There is slack in every system, of course, but the lead time to construct new housing acts to freeze the supply in any given month. The second rigidity is that rental housing and for-sale housing are not fully interchangeable goods. There is a resistance to renting out a house that is for sale. Some of this comes from liquidity issues; the would-be seller gets a flow of income rather than a lump sum, and that does not suit everyone's needs. And some of the resistance comes from the experience base with renters, who can in some cases present legal and other problems. Condominiums are generally more sale-rent interchangeable than single-family houses, partly because they are embedded in a maintenance matrix that blurs some of the distinctions between renters and buyers. That is why we have seen a very active market in condominium rentals over the past year. The single-family house market, though, is far less flexible, with the result that even though we have lots of empty houses, owners -- including banks -- are reluctant to rent them out, even though that would bring in income for them. But, if house prices continue to decline, and the demand for rental housing continues to rise, eventually it will reach a point where houses become attractive investments as rental properties. That is exactly what we are beginning to see in parts of Florida. In January, home sales were up 4 percent in the Sarasota-Bradenton area and up 13 percent in Charlotte County-Northport. And a significant number of those home sales were to investors who plan to rent them out. The numbers are still small, but if the housing market can turn around anywhere in Florida, which is one of the hardest-hit states, it is very possible that we are seeing the first signs of a recovery nationwide. Spring is near; the tree frogs around here are confident about that. The long winter of our housing market decline may finally be coming to an end. James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.

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