High Housing Prices are Here to Stay?

Could the most sensible NRO “economics” piece of the week be from Jerry Bowyer? Or have I lowered my standards to say that something that is only half right is worth reading?

Bowyer gets the data right – new housing sales are strong, which reflects the strong housing construction over the past several years. He also notes that the demand for housing increased as interest rates fell. As far as immigration increasing the demand for housing, doesn’t all population growth tend to shift the demand curve outwards? Also note that if the increase in housing supply outpaces the increase in housing demand, one would expect housing prices to fall.

Actually, there are two debates going on regarding the rapid increase in housing prices. The bubble types argue that housing prices exceed what the fundamentals would suggest. The fundamentalists, which seems to include Bowyer, are arguing that the high housing prices are due to the above changes in fundamentals. Bowyer’s premise seems to be that housing prices cannot fall, but if the fundamentals change – then why wouldn’t housing prices decline? Interest rates have been increasing of late – and population growth over the next generation is likely to be quite modest.

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