Market is a complex conjunction of various market operations, which works to maintain close interrelationships between suppliers and buyers. It appears, however, that market efficiency largely depends on how soon particular market niches can achieve equilibrium, as well as the quality of this equilibrium. The housing market is the brightest example of the way equilibrium works in broader economic contexts. Given the scope of housing operations in the U.S., as well as their complexity, it is obvious that housing market equilibrium can readily serve the source of macroeconomic stability in short and long run. In his article, Nick Timiraos sheds the light onto the major controversies of the current housing markets as well as the ways market equilibrium works in real-life contexts.
Timiraos refers to the Case-Schiller home price index as the determining economic index of market equilibrium in housing. The author is confident that apart from the growing gap between the level of demand and the level of housing supply, the housing prices have not fallen low enough to stimulate consumer spending. “Home prices have returned to 2002 levels in nominal terms and to 2000 levels when adjusted for inflation. Looking at the historic ratio of home prices to rental prices, home prices are now 9% below the normal market value” (Timiraos). Looking at the dynamics of prices through the last 20 years, it is obvious that housing prices have fallen 18% down their historical level, which, if combined with the persistent lack of housing demand implies the existence of the severe market disequilibrium (Timiraos). Despite the fact that prices that are gradually falling down, buyers are still too reluctant to buy: they are influenced by long-term economic expectations and believe that there is no sign of stabilization in economics and housing. Consumers are waiting for the housing prices to achieve their historical minimum, which will also increase their purchasing activity. Until that happens, the housing market in the U.S. will hardly close the existing demand-supply gap. Currently, only the rent market can boast relative stability due to the growing number of customers who continue to rent; and “while the buy-or-rent dynamics vary drastically from market to market, we’re curious if there are any readers who think now’s the time to make the jump from renting to owning” (Timiraos).
From the viewpoint of economic theory, market equilibrium is achieved when the level of demand is equal to the level of supply. In any state of market equilibrium, there is only one price that is relevant and can maintain this equilibrium state unchanged. In housing markets (and Timiraos is correct) the levels of supply and demand are too different to ever turn into market equilibrium. With the growing financial tensions, customers have substantially reduced their purchasing activity, and houses were the first to suffer the negative consequences of the financial crisis. As more and more customers face serious financial challenges, and as fewer customers can afford purchasing a house, the housing market experiences a dramatic price shift. In these conditions, housing market equilibrium is possible only in case the price becomes low enough as to stimulate consumer demand. However, in the light of the basic economic principles, such market equilibrium will be very temporary, for increased housing demand will consequentially stimulate another price growth, which in its turn will establish a new equilibrium price in the housing market.
In conditions of continuous financial pressures, markets find it difficult to achieve the long-term equilibrium. Where prices are too high for customers to afford, markets are characterized by the growing gap between supply and demand. Equilibrium in the U.S. housing market will be impossible until the prices fall enough to stimulate consumer spending. Such equilibrium, however, will be temporary, for the growing consumer spending will immediately cause housing price growth which, in its turn, will lead to the creation of the new equilibrium price.
Timiraos, N. “Home Prices Significantly Undervalued, Should Renters Buy?” 2009. The
Wall Street Journal. 09 June 2009. http://blogs.wsj.com/developments/2009/05/26/home-prices-significantly-undervalued-should-renters-buy/