SHartwell

The WSJ Is Wrong on the Housing Crisis

"Existing Inventories" is a difficult concept.

Suppose I'm in Chicago and want to move to Denver. I put my home on the market (that's 1 home in existing inventories). But I ask too much and it doesn't sell. And I won't buy a house in Denver until my Chicago home sells.

Jim lives in Denver and wants to move to Miami. He puts his house on the market (that's 2 homes in inventory). It's ideal for me, but I won't buy it because my house hasn't sold.

Sallie lives in Miami and wants to move to Chicago. She puts her home on the market (that's 3). It's ideal for Jim, but he's not biting because I haven't bought his house.

This situation creates an "existing inventory" of three houses for sale. Months of inventory looks even worse, because homes aren't being sold at a very fast pace.

But then I finally get realistic I finally get realistic about price and sell to Sallie. I buy Jim's house. Jim buy's Sallie's house. POOF! The "existing inventory" is gone - without any need for household formation...

Because of this, many people focus on the number of vacent houses. This number looks big (all time high, they say), until you realize that it's been on an uptrend for 40 years - and it really isn't that much more than it was 1, 2 and 5 years ago.

The builders are currently building at a rate much lower than household formation, whereas the problem was created when they built at a rate much higher than household formation. This will eventually work itself out - just like any commodity cycle.

The investment decision rests on just how long you think this will take...