Why 2007 real estate prices are defying the laws of economics.

In our Mid 2007 Construction Report, one confusing aspect of the report is how it is that with rising inventory, a slow market, the fact that there is no shortage of lots and more new lots coming; prices are not dropping. Economics 101 would tell us that with the supply side so heavy and demand so light prices should be falling, but they really are not.

If a home was just a commodity, the price would be based on supply and demand but there is much more to it. For one, emotion. I have said many times. If buying a home was a business-based decision we would all be living in mobile homes. Think about it. Why do we spend $240k on a home when we can get the same thing (yes not as fancy but still 3 bedrooms and two baths and 1,700 square feet) for about $40K. The home buying decision process operates outside the laws of economics.

Another factor of home prices not falling is greed. Even though the market is full of options most people are not willing to "lose" money. They are not anxious to sell it for less than what it may have been worth at peak market value, or at least not much less. Many people compare the home values of neighbors. How many say comparatively their home is worthless? I have a bigger yard, I have more amenities, etc.

Yes, I realize it is difficult to simplify things because I did not factor in the value of location, appreciation or schools. Marketing a home is everything.