Existing-home sales rose a second month in a row during May, but prices again fell sharply. Home resales increased by 2.4% to a 4.77 million annual rate from 4.66 million in April, the National Association of Realtors said. Distressed property sales have pushed prices lower, year over year. The median price for an existing home last month was $173,000, down 16.8% from $207,900 in May 2008.The economic law of supply and demand says when prices fall because supply has increased, demand will rise. That is exactly what they report has happened. Isn't it nice to know what we learned in Econ 100 is still true?
The only time this mechanism doesn't work is when we experience deflation, when falling prices cause people to hold off purchases in the expectation of even further decreases. Deflation is no joke; it can cause the economic equivalent of a death spiral, a race to the bottom. It appears deflation is not happening.
