I got into a little debate on a thread on another site about the deflation. I am afraid I was wrong in one of my arguments. I said that housing prices fell after the collapse because of massive liquidation. My opponent jumped all over this showing a chart illustrating how housing sales plummeted thus refuting my claim that prices fell because of liquidation. Was I wrong? Why exactly did prices fall in the collapse?
Like the prices of all goods, housing prices move up and down with changes in demand and supply. Housing prices plummeted because demand fell and supply rose. The reduced volume of house sales came from the fact that demand fell more than supply rose. Under those conditions, both the price and quantity traded of a good will decline. If the increase in supply was more than proportional to the reduced demand then price would fall the quantity traded would rise. So, in the housing collapse, demand fell relative to the increase supply. Demand for houses fell from investors pulling out and mortgage credit drying up.
If you define liquidation as “traded” then if housing prices fell and the quantity traded declined, there must have been a stronger leftward shift of the demand curve for housing than rightward of the supply curve of housing. So it was the drying up of demand for housing, not the flood of supply that caused housing prices to fall while at the same time “liquidation” declined.