The Reflex Effect

Chris Palmeri

Paul McCaulley, chief Fed watcher at bond giant Pimco, just shared his firm's latest take on housing. Pimco has identified three key indicators of market weakness: inventory of unsold homes, price discounting and slowness in affordability. In September, when Pimco last looked at the big picture, these measures had not yet turned negative. By December they had. McCaulley notes that the housing market is "reflexive," or momentum-driven. Rising prices get more people excited about buying, even though they're paying more. Falling prices make people less excited about doing any transaction. This observation has broader economic implications. Even if home prices don't fall, sales could decline, putting less money in people's pockets and slowing the economy. That's evident in today's stats from the California Association of Realtors. Even though the median-priced home in California jumped 16% in November to $548,400; sales declined 11.2%, to 579,560, from a year ago. “We are starting to see the ‘soft landing’ we have been expecting,” said the association's chief economist Leslie Appleton-Young. And the reflex effect McCaulley's talking about.

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