The Pent-Up-Demand Meme Is Complete Nonsense

Author: IrvineRenter | Posted: 26-12-2008

The realtor spin about "pent up demand" is complete nonsense. There is probably a lot of pent up desire for housing, but demand is measured in dollars, and there is a major lack of demand with the absence of lender funds, and a large and growing "pent up supply" of foreclosures.

Nobody wants to lose money when they sell their house. Many sellers put no money down, so they were not losing any money, only their credit score. However, many sellers have lost some of their own money. So why are they selling? In the crash of the early 90s in California, many people submerged beneath the debt on their homes. They were unable to sell, and the few that had to sell due to job loss, divorce or other circumstances created the foreclosure problems of the early 90s. However, for as bad as the foreclosures were then, foreclosures have already quadrupled the previous peak, and the problem is only getting worse.

Most people are selling because they cannot afford the payments. Many probably still believe real estate is a great investment and all the other kool aid nonsense they believed when they bought the property. Unfortunately, they were unable to hang on long enough to enjoy the benefits of their great purchase. The ones who have capitulated already are the lucky ones in many ways. The disaster is over for them. Now they can go back to living within their means in a rental, and the crushing debt service payments are a distant memory. The owners who have not capitulated yet, the ones who have the means to hang on longer, they are the ones for whom this price collapse will be a major disaster.

Bear markets are self fueling. Once a price decline gains momentum, the "weak hands" are shaken out, and as they are, they sell and drive prices even lower. This puts a new series of owners in distress and creates a downward spiral. The only thing that stops a bear market like this one is capitulation among owners who give up waiting for prices to come back to breakeven, or a new influx of buyers.

Larger numbers of buyers will not enter the market until prices are affordable. Once a vicious price decline gets underway, the tightening of credit prevents many buyers from committing financial suicide. Whereas lenders were willing to give anyone $600,000 a few years ago, now they are only willing to give $300,000 to a select few with good jobs and solid credit ratings.

There are always people who want to own a home. There is probably 95% of the populace that is desirous of real estate, but only 65% of households that actually own. This 30% represents the pent up demand that realtors insist will save the housing market. However, since this 30% lacks the ability to finance the transaction and sustain ownership, this pent up desire does not translate into pent up demand.

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