The housing turnover rate. I'm a first time home buyer. I purchase your house for 340,000, financing 329,000 at 5.875% for 30 years in Arlington VA on October 30, 2008. If the seller had purchased the property in 2000 for 203,000, they would be 'in-the-money' by 137,000 plus the amount they paid in principle during the first 8 years. The seller could then use the proceeds to finance the purchase of another house at a higher price, hence the term 'trading up'.
Trading up does not happen without:
a) first time home buyers,
b) investors,
c) other demand sources- immigration/jobs/population demographics.
If there is no demand from one of these sources, trading up does not exist and cycle grinds to a halt, much like was happening at the time of my purchase. The house price depreciation problem (or good fortune depending on your perspective) can also be characterized as a demand problem.
Demand was exhausted as the supply of credit went to borrowers who would not obtain a mortgage under normal conditions. The supply of credit was made possible by the rapid expansion of securitization and the re-distribution of credit risk, hence subprime lending, piggy back loans/2nds, alt-a lending, no-doc, and low-documentation mortgages.
Prices rise when demand exceeds supply. Pent-up demand enabled builders to ramp up new construction. The fundamental problem with new construction is that it takes the builders 6 to 18 months to complete the finished product, which was based on demand in the past (can your builder spell futures contracts?). In some areas the expansion of credit led to a build-up in the outer edges of suburbs, as in Northern Virginia, while other areas experienced subprime lending.
By the time late 2007 or early 2008 comes around, the supply wave is still in the pipeline and the demand wave is long gone and credit has contracted to only borrowers with the best credit histories. Prices will rise as the supply of homes shrinks and new investment occurs in the form of jobs.
