Economists say the darndest things!

From the Wellesley Townsman, we have Anne-Marie Smolski talking about Sales of Mass. homes continue to drop.

According to Wellesley resident Karl Case, a nationally known real estate expert who teaches economics at Wellesley College, the decline in demand is being matched by seller resistance, and the sellers are holding out for what they think the property is worth. Furthermore, he said, the market is close to becoming illiquid, that is, properties are just not trading hands like they were.

I have news for you, bubba!

Housing (along with art, collectibles, etc.) is the ultimate illiquid market. Always has been, always will be.

An asset is said to be liquid based on how fast it can be converted into cash (or cash equivalents.) This is the "textbook" definition.

By this measure, stocks, bonds, futures, etc. are quite liquid because you can easily sell them on the market.

Let us understand why they can be sold quickly, and the rest of the argument will be utterly obvious.

The first and most important point is that they are fungible. One common share of Microsoft is the same as any other common share of Microsoft. Secondly, there's an actively traded market so you can easily determine the current price of Microsoft. Lastly, if you want to sell your shares of Microsoft, since there's no God-given right that a buyer must exist, you need a mechanism to trade it. Enter the "market-maker" who will be happy to take the shares off your hand (for a premium, of course!)

It is these market-makers that provide liquidity to the market. (And let me state that even in these so-called liquid markets, liquidity can dry up quickly if no market-maker is willing to take something off your hand. In short, liquidity is a dynamic thing not some static thing that exists independent of the object.)

Compare that to housing : totally non-fungible (each house is unique,) no mark-to-market mechanism, and definitely no market-makers. (Same goes for a Van Gogh painting, or the first edition of James Joyce's "Ulysses" -- although there are market-makers for the latter.)

Also, it should be noted that providing liquidity is a function of the price level. At a low enough price, everything becomes liquid. I will happily take any Van Gogh painting anywhere in the world, sight unseen, and pay for shipping and insurance for under $10,000.

Economists have a long history of saying stupid things, or blaming bad events on the lack of liquidity. "If only liquidity existed, things would not be thus", etc. etc.

I have news for these economists.

Market-makers exist to make money. They will not take on positions that they are likely to lose money on. Boom! That's why the liquidity spigot can be shut off at a moment's notice.

As a trader in the real world, this abrupt shutting off of liquidity is something that we definitely take into account in our models.

Mr. Case is a famous economist but ignorant of the real world to the point of spewing garbage.