US housing slump likely to avoid recession

A British think tank argues that the housing slump is unlikely to lead to a recession.Most newspapers lead with the story of decline in housing prices. Now is that a surprise, it was expected for long time that at some stage the housing prices will stop going up and decline.

The easy trade on this was over long ago. The home builders will change strategy and tactics to counter this. During the boom the mantra was large houses. Now to improve affordability they will shift to smaller houses. There is lot of talk about discounting by home builders, isn't that a logical response to market conditions. The car makers resorted to 0% financing to simulate demand. Price promotion is a legitimate marketing tool used by millions of businesses worldwide everyday, but the bears make it sound like a scandal or criminal behaviour.


The other point constantly being harped about is options arm. Options arms is the new Y2K equivalent problem. It is so well publicised that most with option arms are already seeking solution to their problem unless they are living in a cave. Mail boxes are flooded with various solutions to option arms, if you read newspapers, or listen to radio the solutions to option arm is the most heavily advertised thing currently. That is the case at least in part where I live, things might be different in the analysts caves.

The worst people to get your information on macro trend is from salesmen. Lot of commentators are quoting the real estate agents as source of their bearish hypothesis. Anyone who has worked long enough with sales people in any industry knows that the worst analysers of trends in industry are sales people. Their view is completely driven by their incentives and commission. Most of them lack long term perspective like the so called macro and big picture analyst who rely on them to form their opinion.

One of the things about housing is that people are willing to live with bad decision for long time. So unless faced with dire emergency no one is going to go and sell house because prices are dropping. Sellers who do not find buyers at the price they want will pull out of market. The worst sufferers are speculators and flippers. Consumer behaviour in high ticket, high involvement, and high conspicuous value products like housing is not as simple as some of the analyst are basing their hypothesis on.

THE slump in the US housing market will see the American economy slow sharply next year, but it is likely to escape a plunge into recession, one of Britain’s leading economics think-tanks said yesterday.

Fears of the scale and impact of the housing downturn were fuelled yesterday after bleak figures showed that the average price of new homes in the US tumbled by 9.7 per cent last month from a year earlier.

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The steepest annual fall in new home prices in more than 35 years followed figures on Wednesday that showed prices for existing homes suffered a record year-on-year drop of 2.5 per cent in September, the worst fall in four decades.

But despite the price falls, Britain’s National Institute of Economic and Social Research said yesterday that it was very unlikely that the US would be pitched into recession.