Friday, May 2, 2008

Expectations....

If this is true (and I have no reason to suspect it isn't), and if it's been going on for a while (which may or may not be a valid assumption), say three to six months; how do you think this shapes consumer expectations? This is important because expectations shape decision-making both in the immediate term and - to a lesser extent - in the longer term. After all, expectations help determine supply and demand.

I look forward to your thoughts. To what extent do expectations shape activity? Do you think information of this type (either prior to correction or after) is helpful, harmful, or neutral?

2 comments:

Gabriel said...

I'm not sure but, as far as I understand, in the US people's mortgages are a function of the market value of the home... I don't know how banks estimate that, thought. Or, am I missing something?

Tim Schilling said...

Gabriel,

You are correct. I see this impacting expectations in a couple of ways.

First is the "wealth effect." If the value of my largest asset is declining (or more specifically if I'm continually being told it's declining), it will affect my choices about spending vs. savings. I may hold back on other spending and choose to save more to make up for lost value.

The second avenue I see is in the actual market itself. If I continually hear that prices are declining on homes, it will affect my pricing if I'm selling, and it will affect my offer if I'm buying. Ultimately bid and offer need to match, but if both parties are going in with reduced expectations, the price (and the size of the mortgage) will be impacted.

Those are the primary impacts as I see them. Other people may see others.