More on Housing Prices

David Leonhardt has an interesting column on the question of how much of the run up in real estate prices during the last two decades resulted from the bubble and how much is the natural result of higher incomes.

All agree that prices were significantly inflated by the bubble, but dispute if prices have generally reached their natural level or have significant amounts to give back.

Missing from this analysis is what happens if the income version of this story is true, but incomes start dropping due to deflation? It already seems to be happening with pressure on public employee salaries, shifting of the health care burden to employees and general deflationary pressue, especially with the hordes of unemployed workers willing to take jobs at lower salaries.

I believe that this will leave us with years of struggling to reach the bottom.

On a microeconomic scale, it seems that in most markets supply is still seriously outstripping demand so lower prices will almost certainly come from that.


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