Thursday, February 26, 2009

The Falling Prices Fallacy

Why is it that home prices must always increase and falling home prices are commonly considered a bad thing? Apply that same logic to gas prices. Gas prices are always looked at from the perspective of the buyer and thus falling gas prices are always preferable. What about those who have positioned themselves as sellers in the gas exchange who stand to benefit from increasing gas prices? Recognize this farce: how many people were taking the side of gas station owners or others on the supply side of the oil equation when consumers were “gouging” them with cheap gas prices?

Why are home prices rarely looked at from the buyer’s perspective and that falling prices make homes more affordable for those who are looking to purchase? This idea of ever-increasing home prices perpetuates this ill-conceived notion that homes provide an infallible savings program despite the economic climate. When will people recognize this simple equation: for every seller, there must be a buyer. For every swing in prices, there is a party who benefits and a party who suffers. One can’t always parlay their current house into a bigger house because it will always gain in value.

But we should know this by now. How long has the government (through the Federal Reserve) been artificially depressing interest rates and flooding the market with newly printed money in order to pander to their constituents and keep up this ruse that everyone must own a house? Rather than continuing to wreck this economy with their never ending bailouts, their “investment” of tax payers money into programs like Fannie and Freddie, and their ongoing war against falling housing prices – why don’t they let the market determine housing prices and interest rates? Well, then we wouldn't need our benevolent leaders and central planners, would we?

When money is so cheap, why NOT borrow and spend? What is the incentive to save? So you can make a measly 2% in a savings bond or a CD? That doesn’t even keep up with even the official CPI as tracked by the Labor Bureau (not to mention what CPI would be if they would actually compute it the way they used to or include such costs like energy and food).

As is always the case, there are ebbs and flows in the markets. The best thing that could happen right now is for home prices to fall and interest rates to rise. Higher interest rates will effectively create a stockpile of aggregate capital that can be used to finance our inevitable future spending binge once pressure is put on the Fed to drop rates again. But if you get rid of the Fed, and get government out of the business of money management and central planning, markets will correct – and home prices will become more desirable.

That is if one does the unthinkable and looked at the situation through the lens of the buyer.

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