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From Linda in LA-LA-Land:

"There is certainly a possibility that we have reached a new level of ownership premium our society is willing to pay. The ratio of housing costs to income may have changed forever. Not too long ago, people used to buy stocks for their dividends. Now they buy it because they think someone else will buy from them at a higher price. Things change.

From some reports I read a few days ago, home prices in UK and Australia haven’t exactly crashed. Who knows what will happen in US ? I am willing to take the risk of that happening. Because I think the probability is low. This is not an inflation in asset priceses alone. There is a credit bubble. I am betting on it to burst. If I am wrong so be it."

Most of us here debated --and dismissed-- the bulls's "new paradigm" arguments long ago as basically meritless and concluded that reckless lending/borrowing (thanks to the Fed & GSEs) and rampant, unsustainable speculation (thanks to good 'ol greed & fear) were primarily to blame for the housing bubble. However, when it comes to certain parts of the country --California being pre-eminent among them-- it seems pretty likely that, while prices must eventually correct, they are not likely to fall so far as to bring California and other so-called "prime" areas into line with high affordability levels common in other states.

Are there any truly secular “new” developments which might account for at least some of the rise in housing prices relative to other asset classes and might --if they prove to be permanent trends-- limit the extent of the eventual correction?

Some possible candidates:

1. Rise of NIMBYism, Urban Boundary Limits (UBLs), which are very popular in CA & OR, and pseudo-environmental anti-development laws. These are measurably constraining supply and artificially raising the cost of what new housing stock does get built, reagrdless of whether it's for rental or sale.

2. Shift in federal tax codes since 1996, heavily favoring RE investment/speculation over other assets. $250/500K capital gains exemption, mtg. interest deduction on 2nd homes, 1031 exchange, etc.

3. The tremendous rise of GSEs and MBSs/CMOs since mid-1990s in providing unprecedented levels of mortgage liquidity and risk underwriting (shifting loan default risk from lenders to FCBs and private investors).

Discuss, enjoy...
HARM

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