The LA Times has a great article on the housing bubble, and its stubborn unwillingness to pop, this morning. In it, they talk to a bunch of economists who've been predicting a crash for years now, only to see their best models and most educated guesses foiled by the market's relentless upward momentum. Best quote comes from Dean Baker, who you all remember from the Social Security wars. He writes:
A year ago, Baker was so sure the collapse was at hand that he sold his Washington condo, which had tripled in value in the seven years he owned it. He moved two blocks away into a rental and wrote another article warning that "the crash of the housing market will not be pretty."
He pointed out that housing prices traditionally didn't rise faster than inflation, but that on the coasts the price jumps were exceeding that level by double digits. He dismissed the argument that prices were increasing because of immigration, or the scarcity of land or the demographics of the baby boomers.
Despite this excellent list of reasons, the crash stubbornly refused to happen.
"It's kind of troubling, like you were a physicist studying the laws of motion and you see an object that ignores gravity," Baker acknowledged.
That seems about right. But the fact is the housing market simply can't sustain itself long-term because most folks can't pay the prices being asked. What you've been seeing is a lot of trading: person A's $350,000 home shoots up to $500,000, so he sells it, borrows/liquidates $100,000, and moves into a new $600,000 place. The owner of that place does the same thing, moving into an $800,000 place. And so it goes, both up and down the food chain.
But the reality remains that wages just aren't growing this fast, they're barely keeping up with inflation (indeed, last quarter, they didn't), while housing prices are racing past them both. So the only real way for people to buy these homes is to cash in on places they already own, liquidate assets, or borrow. That'll sort of horizontal motion will keep the market moving for a bit, but long-term it's not sustainable. Sooner or later, the market will slow to accommodate new buyers rather than seller and traders; the only question is whether, in doing so, it busts or it rusts.
Moving to policy on this, the government is going to have some culpability for the ensuing pain. Read Ben Wallace-Wells' excellent piece on Alan Greenspan's attempts to sustain the recovery by exposing home buyers to risk and ruin. Important stuff.