Friday, October 17, 2008

Fewer Housing Starts is Good News, Not Bad

Another AP article. This time at Yahoo!Finance. The lead story on their site says "US stocks set to open lower after housing data". In their imbecilic efforts to attribute every stock movement to a news story they misunderstand that this is good news for the financial panic.

Home prices across the United States are still falling. Not as quickly as they were earlier this year, but most major markets are still dropping. The price of anything falls for the sole reason that there is more of the product than people want to buy at the current price. What would be truly scary is if home construction was increasing during a glut.

For all of these mortgage backed securities to attract investors we need the price of the underlying assets (houses) to stop falling. Few want to buy these securities because they are uncertain what they will eventually be worth (Well, security holders are also hoping the Hank Paulson is going to give them an above market price). The more rapid the decline in home construction, the sooner we hit the bottom of the contraction. In short, not only is it good news that home construction is declining, but it is better news that home construction is declining faster than originally predicted.

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