If I were an investor with enough resources and financing lined up to build some residences but I had the luxury of waiting to time it properly, I would obviously wait until the signs pointed to a demand curve that would shift in my favor some six months down the road.
For quantity demand to reverse itself and present me with a more satisfying price equilibrium, I would have to focus on the Income and Number (of buyers) determinants among those Slavin (2008) combined into the TIPEN model. At this time, the three other factors are either irrelevant or combine to depress quantity demand some more in the foreseeable future.
The cheering news about GM having emerged from bankruptcy rather earlier than expected does not change the picture of housing demand determinants in Detroit. Neither does another story that “green technology” makers are coming to the city, to replace at least some of the job losses. For far too long, the Big Three have recorded losses in their financial statements and lost market share to foreign makes. The ongoing recession not only sent consumer demand for cars reeling, but it also resulted in a drying up of consumer financing which is vital to new-car sales (The Economist, 2008).
Plant shutdowns in Detroit have spilled over to component makers around the state. Hundreds of dealerships around the country have been shuttered permanently. The recession will not soon end, Mr. Obama admits (Babington, 2009). Counting on population and incomes to “bounce back” to anything approximating normal in the Detroit market is a forlorn hope.
That the shrunken Detroit market may well become an enduring fact of life is reinforced by the existence of the “other auto industry”, based in the South and resolutely unaffiliated with the United Auto Workers (Wall Street Journal, 2008). Most of these competing assembly plants are “transplants” from Japan and Europe, it is true. But the point is their average wages are lower and they make smaller, more fuel-efficient models. A real estate investor is therefore well-advised to forsake Detroit for the time being and head south.
Meanwhile, housing starts rebounded in June, the same month that single-month unemployment numbers reached the worst-ever for the current recession. Is the former an encouraging sign or a fluke? More likely the latter since it is forecasted that housing prices will continue to drop until year-end 2010 or mid-2011 (Global Property Guide, 2008).
Hence, we have yet a third element, price expectations (national, it is true), that has an adverse influence on the quantity demand curve.
In conclusion, the time to invest in the domestic housing market is very likely no earlier than early 2011.
References
- Babington, C. (2009). Obama: Full world economic recovery ‘a ways off‘. Associated Press wire feed.
- The Economist. (2008). American carmakers: Surviving the crash. Web.
- Global Property Guide (2008). Waiting for change for the U.S. housing market. Web.
- Slavin, S. L. (2008). Economics (9th ed). New York: Mcgraw-Hill Publishing Company/Irwin.
- The Wall Street Journal. (2008). America’s other auto industry.