We are told on one hand that we are just seeing a minor slow-down, and everything will be all right. On the other hand, we are warned of a coming meltdown of unprecedented proportions. In order to understand for ourselves what is going on, we must understand the dynamics of the housing market.
Housing is unlike any other asset. If, for instance, you want to sell a stock, you just sell it. There is a pool of ready buyers willing to buy the stock on the open market. Housing, on the other hand, being such a large, indivisible asset, is much more difficult to move.
For example, let's say Abel needs to sell his house, and Brian wants to buy it. Brian, however, must first sell his house to Charlie. Charlie must first sell his house to David, and so on until someone buys a house from someone who does not first need to sell his own house.
If we would put a dot on the map for Abel, Brian, Charlie and David's houses, then connect the dots, from Abel to Brian, Brian to Charlie and so on, we would have a line zig-zagging across the map. This line from end to end represents one successful housing transaction. The only way for any one in the chain to complete the sale or purchase of his house is for everyone else in the chain to complete the sale or purchase of every house.
The housing market consists of a large number of these “lines” of transactions. Think of the map looking like a bowl of spaghetti with all of these extending through it. Typically when talking about a system, this kind of relationship is called a “chain” with, in this case, each link being a purchase or sale of a house. The number of successful real estate transactions is determined by the number of these chains that form, times the average number of links on each chain. You can increase the amount of successful transactions by either lengthening the chains or making more of them. Click here for the full article.