Wednesday, October 14, 2009

My friend Suzanne Gillespie sends me a story on the Las Vegas Housing Market.

CNBC reports that houses in Las Vegas are falling apart, and that at least one buyer went to a homebuilder for a new house because she couldn't find any existing home that was acceptable.

This is actually a good example of what Ed Olsen was writing about in his seminal paper, "A Competitive Theory of the Housing Market." When prices fall below replacement cost, housing deteriorates until its depreciated cost equals price. Once this happens, housing markets are in equilibrium. The fact that the inventory of houses available for sale in Las Vegas has dropped to four months suggests that it is near its equilibrium level.

We could just be happy that the market in Vegas had returned to normalcy where it not for the fact that the deodorization of houses has almost certainly produced negative externalities--i.e., blight. (I was last in Vegas late last spring, and it looks pretty awful). But it is amazing how quickly markets adjust.


Anonymous said...


Anonymous said...

Deteriorated price equals cost. Interesting. Considering that the average home only lasts 75 years, they should slowly revert to land value over time. In a free market, a 70 year old home should not sell for the same price as a brand new home (replacement cost).

Ergo, the housing market is not free. A different algorithm must be used to model it.

Bank CD Rates said...

This really is a pathetic condition. According to me its all due to present ongoing global economic recession that shattered the entire real estate industry all over the world.