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The Reflex Effect

Posted by: Chris Palmeri on December 22, 2005

Paul McCaulley, chief Fed watcher at bond giant Pimco, just shared his firm’s latest take on housing. Pimco has identified three key indicators of market weakness: inventory of unsold homes, price discounting and slowness in affordability. In September, when Pimco last looked at the big picture, these measures had not yet turned negative. By December they had. McCaulley notes that the housing market is “reflexive,” or momentum-driven. Rising prices get more people excited about buying, even though they’re paying more. Falling prices make people less excited about doing any transaction. This observation has broader economic implications. Even if home prices don’t fall, sales could decline, putting less money in people’s pockets and slowing the economy. That’s evident in today’s stats from the California Association of Realtors. Even though the median-priced home in California jumped 16% in November to $548,400; sales declined 11.2%, to 579,560, from a year ago. “We are starting to see the ‘soft landing’ we have been expecting,” said the association’s chief economist Leslie Appleton-Young. And the reflex effect McCaulley’s talking about.



BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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