Are we doing the sudden stop in new home sales?

Kathileen Madigan at WSJ looks at new home prices and old:

Two different segments of the housing market are yielding two different price trends.
When discussing Wednesday’s news that existing home sales climbed in March, National Association of Realtors chief economist Lawrence Yun said the 7.8% yearly rise in March’s median price was unsustainable. “This price gain of near 8% is not healthy, considering people’s incomes are only rising by 2%,” said Mr. Yun. “The only way to relieve housing cost pressure is to have more homes coming onto the market.”
Yet research by economists at TD Securities show the uptrend in resale values is nothing compared to the speedy rise in new-home prices.

Will we do the sudden stop on new home sales?

Unsustainable means the market will be filled. When that happens, the flow of additional interest payments from mortgages stops. That in turn means short term credit becomes tight, having no back up collateral. The short end of the curve flattens flattens.   Why is that? The long and short term credit markets have to stay connected, so we get a steep yield curve. Connecting the credit network means keeping enough credit activity at the knee of the curve, ensuring enough market liquidity. 

Is this a crash?

No, not necessarily.  There was no sharp moves in home prices during the run up to the 2008 crash, the housing market performed fine. See for yourself on the chart above, those prices in 2004-2009 seem smooth and symmetrical to me.   Housing will cause a small rise in short term credit, then the flattening. Housing prices, by themselves, seem to adjust as needed. Home owners are a hetergenous lot, each with different credit demands and constraints; mostly unconnected, hence liquidity is not hampered. 

On the other hand:

The City of Chicago, or the California public sector are no hetergeneous mix.  For example, all the public pensions tie the stock market back to local government budgets and back to public sector employment.  California being 15% of the economy has all this connected up.  And this employment is tied back to DC which handles the flow for the mix government programs out here. And these mixed programs, like Obamacare, tie back into the pension payments of the public sector.  And the adjustment volatility of adapting these new programs again effect local government budgets.  Then the Obamacare tax changes alter the tax collection in California, and that changes the funds flow from Sacramento back to city and county governments. Finally, we have the sudden retirement shift as each laid off public worker picks the same timeframe to retire.

So as housing adjusts with no problem, But the California public system get massive jitters and segment and fail.