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Home Publications Blogs Beat the Press Distressed Sales are Simply Part of the Process of a Deflating Bubble

Distressed Sales are Simply Part of the Process of a Deflating Bubble

Thursday, 31 March 2011 04:45

USA Today had a piece that reported that distressed house sales are likely to depress house prices for years to come. The piece never refers to the housing bubble. This is remarkable since it is impossible to understand the housing market without reference to the bubble.

At its peak, the bubble pushed house prices more than 70 percent above their long-term trend values. The fall in prices to date has brought prices closer to their long-term trend, but the market still has to fall another 15-20 percent to return to its trend level. Distress sales are part of this process, but the main point is that house prices are still well above the level that would be supported by the fundamentals of the market in large parts of the country.

Comments (3)Add Comment
No Fear, They Clear: The Sweet Spot of Free Market Equilibrium
written by izzatzo, March 31, 2011 5:32
Why does free market socialist economist Baker have to lecture free market capitalist journalists of USA Today on how markets work?

Don't they believe in the free markets they preach daily? Don't they believe that when surpluses and shortages appear in the short run from asset bubbles or otherwise that markets work to clear them in the long run with no unsatisfied buyers or sellers at the new equilbrium price?

Even arsonists understand that an arsonist bubble of over-supplied surplus fires must be corrected with declining fire prices to match the quantity demanded of fires before arsonists can earn normal arsonist wages again.
written by bmz, March 31, 2011 7:32
izzatzo: Apparently not; that's the point of the post--which you apparently didn't understand--or is that not news?
written by Virginia Wolf, March 31, 2011 1:57
One of the reason distressed or forced sales take longer to clear is that often the sellers take advantage of the rules and cheat, sell the house at the minimum that the bank agrees to to a friend or relative in hope of a quick sale at a higher price, which is will still be well below market rates, causing the house to churn over at least once and drag averages down, thus depressing nearby prices more forcefully.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.