It is being reported that new home sales plummeted in the month of February. This is being reported as bad news for the housing market and bad news for the economy. I am not trying to be a contrarian just for the sake of doing so, but I disagree with the so-called mainstream opinion on this one.
Unless you have been living under a rock, you know that housing prices are way down, a lot of people are underwater on their homes, and foreclosures are high (and would be even higher if the banks had their acts together). Unless you are shopping for a house right now, news in the housing market is really bad. But why is a drop in new home sales seen as a bad thing?
Although the government has intervened a lot in a lot of different areas, there is still some semblance of a free market. The fact that new home sales are dropping is the proper response of the market to the situation. There are a lot of vacant homes and a lot of other occupied homes in which the owners would like to sell. If there is already an oversupply of houses, then home builders should not be building new homes, or at the very least should be cutting back on the number of new houses being built. A drop in sales of new homes is a signal to home builders to slow down or stop.
While this may not be good for the bottom lines of home builders, this will help clear the market from an oversupply of houses. There are a few people that will insist on buying a new house and that is fine. But most people looking to buy will be willing to buy a used house if the price is right.
The free market is working here and it should be allowed to work. Prices need to continue to go down until the excess inventory is cleared. At that point, housing prices will stop falling and may even start to go up. At some point, it will be profitable for home builders to start building new houses again.
There are a lot of things to be fearful of in this economy. We are drowning in taxes and regulations, the federal government is running massive deficits, state and local governments are on the verge of bankruptcy, and the Fed is creating massive amounts of money out of thin air. But don’t be fearful of a slowdown in new home sales. That is just the market trying to correct the previous screw-ups caused by the government and the Federal Reserve.