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Home prices are notoriously sticky in a slump. “Sticky” means that they don’t fall quickly even if demand drops a lot. The reasons are familiar: Sellers get fixated on what they think a house is worth and refuse to sell for a penny less. So the only buyers are the few people who think houses are worth buying even at the propped-up prices. The trouble is, when prices are sticky, sales volumes fall off even more than they otherwise would. That puts a lot of people out of work, from carpenters and plumbers to real estate agents and closing attorneys. Sticky house prices could even drag the whole U.S. economy into a recession. For a good economic analysis of the impact of sticky prices, read this academic paper by Karl Case of Wellesley and John Quigley of UC Berkeley.
Here’s my question. Are home prices somewhat less sticky in this downturn? There’s tantalizing evidence that they are. After all, data from the National Association of Realtors shows that nominal prices for existing homes (not adjusted for inflation) have been falling on a year-over-year basis, for the first time since recordkeeping began in the 1960s. True, home prices have fallen before after adjusting for inflation, but it’s significant that they’re falling now on a nominal basis, since nominal dollars are the kind that non-economists are used to dealing with.
Builders are biting the bullet and cutting prices, too. So much so that people who bought before the slump are howling. That was a big point in the Oct. 15 BW cover story, That Sinking Feeling, by Mara Der Hovanesian and Chris Palmeri.
Falling prices cause a lot of pain, but they may be just what’s needed to keep sales volumes from plunging even more than they already have. So, back to the question: Are home prices less sticky this time around?
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.