People’s willingness to buy something today often hinges on what they expect the good to sell for in the future.
This is not true for all products — groceries are a notable exception — but it applies to many durable products ranging from canning lids to houses. For such products, people’s expectations of what prices and quantities will be a month or a year down the road exert powerful influence on their inclination to buy today.
Citing canning lids as an example marks me as an economist of a certain age. Only those older than 40 are likely to remember the Great Canning Lid Shortage of, I believe, 1975. It is getting harder to use as an example in class because many 19-year-olds don’t even know what a canning lid is. But the housing market in 2006 is an equally good example of how future expectations dominate current demand and it affects many more people than lids.
Even so, the case of the jar lid is instructive. In the 1970s, many people, especially in rural areas, still canned vegetables and fruits. Canning required new Mason jar lids, and many families used more than 20 dozen lids a year.
Inflation, shortages and resource scarcity dominated the news in the 1970s. In 1972, President Richard Nixon imposed wage-and-price controls when inflation reached shocking levels — about what we are experiencing right now.
The first Arab oil embargo in the winter of 1973-1974 more than doubled gas prices in a matter of weeks. Television news showed long lines of cars waiting at gas stations. Freshman English students at the University of Minnesota were force-fed eco-catastrophist Paul Ehrlich’s predictions of imminent mass famine and global economic collapse.
So it is no surprise that when some grocery stores ran out of jar lids in late summer, many farm wives panicked. It was just one more sign of impending doom. Within a few days of the first reports of shortages, store shelves across rural America had been swept clean.
Even when fresh shipments arrived a few weeks later, some canners who had seen their tomatoes rot grimly vowed, “never again.” When one stalwart farm wife from my hometown entered a nursing home a decade later, her children found nearly 80 dozen lids still tucked away.
A quaint bit of Americana perhaps, but it is a good illustration of how expectations form current buying decisions. We saw the same thing happening with house prices less than two years ago. Some potential buyers made offers above the asking price to ensure that someone else did not snap up the property. The mentality was “buy now or it will cost even more later.”
In 2006, expectations have come around to bite the housing market in the posterior. Now potential buyers are of the mind that there’s no rush to buy because they expect prices to be even lower in six months. That view can and does depress sharply the number of houses sold. Median prices have fallen a bit and are likely to fall some more. They are not likely to rise again until expectations once again reverse course.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.