The Wall Street Journal article "Further Signs of Cooling" by Hagerty and Simon reveals that number of home-purchase contracts signed in October, 2004 dropped 8% from a year earlier at 48 of the nation's large real-estate brokerage firms. Obviously, something has changed. The article continues to explain that there has been a change in supply as well as demand, with substantial increases in the inventory of homes available for sale. This analysis uses economic theory to explain housing factors described in the news piece. .

             Current income is the most relevant determinant of consumption. Other things equal, a higher price level (inflation) reduces the real current income, thus real consumption. The article mentions that there has been a slow growth in personal income. The housing bubble pushed up housing prices, but others factors have come into play such as higher oil prices and higher interest rates. Higher oil prices are serving as a tax on consumers, leaving them less money to spend on other goods such as housing. And, higher interest rates mean buyers cannot afford higher home prices. Previously low interest rates had served as a form of price reduction, but have risen from 5.2% in June 2003 to 6.5% for a 30-year fixed rate mortgage.

             The article states that prices in the country are at or near records. According to the law of demand, the higher the price of housing, the less people will demand. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid home purchases because they will force them to forgo the consumption of something else they value more. As prices fall, the supply will fall as well because profit for the suppliers is declining. .

             Even though the housing market is slowing, the article speculates that it may take six to eight months before sellers accept that the market has softened and reduce their asking prices.