Sticky-Priced, Illiquid Asset
By Arnold Kling
New home sales in July are 22% below July 2005. The decrease is 43% for the Northeast over that same period, and the inventory of unsold new homes is up 22%. Existing home sales are down to 6.33 million in July from over seven million at the end of 2005…
The U.S. now has a futures market based on home prices. The market that opened in May at the Chicago Mercantile Exchange is now showing backwardation in all 10 metropolitan areas trading. The backwardation can be expressed as implying a rate of decline of 5% a year for the S&P/Case-Shiller Composite Index by May 2007.
Housing is not a typical financial asset. Stocks and bonds do not build up such a huge unsold inventory in a down market. The drop in sales volume and rise in inventory suggests sticky prices.
Also, the futures market is telling me to sell my house and then buy it back a year from now. I could lock in an arbitrage profit by buying a futures contract now and then selling it when I buy back my house. But housing is not that liquid. The transactions costs would eat up the profit from the “arbitrage.” Real estate commissions, title search, transfer tax (which is a really stiff tax in Maryland, where I live), etc.