The recent plunge in new home sales in the United States should come as no surprise to those following the housing market in the last six or seven years.
The laws of economics are much like the laws of physics: "what goes up must come down". But it remains to be seen if the more colloquial law stating, "the higher they climb, the further they fall", also holds true.
The meteoric rise of the housing prices, especially in the bi-coastal areas, has been an anomaly to say the least. But the prices have continued to defy the rules and fly in the face many analysts who have believed steadfastly that it can't continue, only to watch in amazement as the market speeds past every predicted bump.
And so today we're faced with almost the same conundrum we encountered with the stock market back in the halcyon years of 99 and 2000. Can the housing market continue its march upward, or is it time to bail? As usual, by the time the answer to that question becomes clear, it's already too late for many. There is little doubt that the housing market is due for a breather, but it can also be argued that housing is a different breed than stocks. For one, they are tangible assets, and for another they are a necessity for people.
But lest we forget, as everything else in life, the housing market follows the old rule of supply and demand. As long as demand is strong and supplies are in check, the prices will continue to rise. The US population is still on a growth path and there doesn't seem to be an over-abundance of homes in the market. Yet one can't help wonder if prices are artificially inflated or if the demand will continue to be in the same caliber that it has been in the past few years.
In any case, average home owners (those with one home) have little to fear. We all need a home to live in, even if the future proves that we overpaid for the nest. On the other hand real estate investors, heavy equity borrowers, and ultimately the banks are in for some pain, should home prices lose their footing and find themselves in the clutches of gravity.