Question

In a recent news release Bloomberg.com reported that the existing home sales declined in December of 2012 (the released article: "Existing Home Sales Decline as U.S. Supply Dwindles", January 22, 2013). As is obvious from the title of the article, the author blamed the reduction in the level of sales on a reduction in the supply of existing homes (existing homes are homes that had already been owned, i.e. not new construction). Which of the following explanations might justify this blame?

Homeowners expect housing prices to increase in the future

Homeowners expect housing prices to decrease in the future

Homebuyers expect housing prices to decrease in the future

Homebuyers expect housing prices to remain constant.

Answer 1

The correct answer is Option (A) Homeowners expect housing prices to increase in the future

Step-by-step explanation:

Existing home sales decline was attributed to reduction in the supply of existing homes. The owners of existing homes would not sell their property only if they believe that home prices will increase in the future. Therefore, they can sell the property at a higher price later.

Had homeowners believed that home prices will decline in the future, the owners would have put-up existing houses for sale so that they get a better price now than wait to see the price decline.