Real Estate: Sales Down and Prices Up - Essay Example

Chicago closely mirrors this national trend and new home data is very similar. Yet, with the steady decline in demand, prices have continued to climb. Umberger states that prices rose 11.6 % nationally and exceeded 32% in Lake County, Illinois. The article further highlights the growing inventory of unsold houses and points out pockets where the data doesn't hold. This is especially true in the high-end home market where inventory is rising sharply and is beginning to experience falling prices. The resiliency of the real estate market and its reluctance to react to intuitive supply and demand pressures are a result of the seller's option to hold their property.

The inelastic nature of the market is largely due to two factors. Typically long lead times for real estate inventory to affect prices and the ability of the seller to exercise discretion both contribute to the seemingly strange market condition. In the article, Bob Walters, chief economist for Quicken Loans, says, "People will hold their house on the market longer, rather than accept a lower price". This seller discretion indicates we may see further slowing of sales before prices begin to slip.

However, warning signs of increased weakening are on the horizon. A Deerfield, IL. the agent said that homes in the 1 million dollar range are beginning to feel the stagnation. He states that houses in this range have as much as a four-year inventory and in some cases have seen a 50% drop in prices in the last few months. The increase in supply in this range has finally caught up with the number of sellers who need to find a buyer. It is showing more elasticity and reacts to a more typical supply and demand ratio.

If the inventory of lower-cost homes continues to rise, prices in the median range will necessarily be affected. In a market where new production is heavily influenced by inventory and prices, falling prices will translate into a further drop in new home production. Analyzing the housing market requires that we not only examine the current situation but also be able to project the near future. Geography, seasonal fluctuations, and short-term anomalies can heavily influence the market. Analysts in the article universally agree that many sellers are holding the price line while waiting for the traditionally busy spring market.

Washington economist Dean Baker warns, "I never make too much of a single month". Geographical settings can also greatly influence the demand for housing. Susan Devlin, an agent in the Chicago area is quoted in the article as saying, ".there are pockets where things fly [.] where people are looking for single-family homes". The overall conclusion of the information provided in the article is that we can expect a near-term fall in real estate prices.