Yes, I think that a slowdown in production by itself would decrease supply, raising prices. This happens when, for example, a construction boom occurs in a landlocked area.

I think the problem Murray is pointing to is not a change in production, but a change in liquidity. This is really a change in demand, not supply. Since it’s harder for people to get loans, those who would otherwise buy are not able to. As prices drop in half of the country because of decreased demand, LTV ratios go up and default rates increase, forcing lenders into margin call situations.

The ultimate cause is Federal Reserve monetary policy. I’ve written a bit about it here.

http://disasterinvestor.com/2008/05/13/liquidity-is-the-problem-not-interest-rates/

Things are getting progressively worse in the former bubble regions of the country. We’re working on a short sale now where the house appraised at $503K three years ago. The bank BPO just came in at $230K, and we have two offers: one at $197K, and the other at $189K.

Oklahoma City is a very unusual market. It’s one of the best places in the country to live for real estate. Demand and prices in our market are increasing despite the liquidity problems. This is happening because of a combination of factors, including rising energy and food prices, a low cost of living, and affordable median housing prices. Companies are moving out here in droves because they can’t afford to hire people in California. I should know, since I moved to OKC for the same reasons.

http://disasterinvestor.com/2008/05/13/liquidity-is-the-problem-not-interest-rates/

I agree with most of what you’re saying about the market in Oklahoma City. Let’s keep encouraging people to buy here, since I want property values to go up.