Negotiation Delays

Several newspapers published stories today about the "resilience" in real estate markets, with the number of new homes sold hitting a new high. These stories did note that the median price of the homes sold did drop, but failed to connect it with the sale volumes. Well, I'm no economist, but here's the way I see it (hmm, I keep pointing out I'm no economist, but then propose my theory on economic issues ... oh well, that's why I have a blog!)

Price in free markets is fixed by a negotiation process. If sales of say new cars aren't doing very well, offer a discount and sales should improve - simple enough. I like to call this 'negotiation delay', although I'm sure there's a technical term for it. In stock markets, information is transmitted quickly, and hence a reluctance to pay higher prices for equity assets quickly results in sellers reducing prices until there are buyers at the new price. Negotiation delays can be longer in real estate markets, especially when individuals are reluctant to sell for a loss (or even for less than what a neighbor got for theirs). After a few months of seeing prices decline, sellers (especially speculators) recognize new information (the bubble may be bursting) and are keen to get out at existing prices, even if it represents a loss.

It is then rational that we should see increased sales at lower prices. It isn't a sign of resilience, just a sign that speculators and some non-speculative sellers recognize the sound of a bubble popping!