Herd mentality and loss aversion seem to be better explainations. The expectation of rising prices raises prices, and the expectation of falling prices lowers them. This is why fiscal and monetary policy has little direct effect. They only act as a psycholgical drivers on those that beieve in the accepted group theories of supply and demand.

Three years ago, people were falling all over each other trying to bid on houses. Now, prices are down 30% to 60% and folks think houses are overpriced? Incomes are basically flat, which means everyone who was priced out suddenly has a chance again.

These are the same houses, in the same locations, in the same school districts. How is it that something folks couldn’t get enough of just three years ago when it was so expensive is suddenly so hated now, at half the price?

The masses are truly manic-depressive about the housing market. I think we need to stop wasting lithium on batteries and start putting it in pills, where it can really do some good.

If folks would hang on to their mortgages for longer they would truly see what a bargain ownership can be. All the cost is front-loaded for standard mortgages. All these rent vs. buy analyses are looking at the beginning costs, but after a decade or more in a house, the numbers tilt hard in favor of owning. Those on the tail end of old mortgages are paying peanuts to live in nice houses. Having a house for five years is not ownership — it is renting from the bank.

I think that you and the people you say “just don’t want to believe” housing affordability are using different definitions of the word.

Your definition seems to be affordibility = family is able to stretch and make payments on a house without default.

My definition of affordabilitiy regarding houses, and I believe that of those you say “don’t want to believe,” involves two relative measures: 1) is owning cheaper than renting over the expected house ownership time period, and 2) how does the current ratios of rent/home-price and income/home-price compare to historical values?

Using my definition, there are certainly some areas of US that are affordable, but I don’t think I would say most…especially in the face of falling rents.

They face negative population trends while their real estate prices relative to incomes start from a very high place.

What examples will Krugman use to support socialism then? He will have to start making up countries.

For generations, the recipe has been for a young family to take out a 30 year fixed mortgage at age 30 or 35, and stretch to buy as much house as they can realistically afford (with bankers judging what is realistic). Gradually pay raises and inflation make the fixed payments easier and easier. By the end of the mortgage, payments are very easy and the house is owned free and clear.

We got away from this model, with refinancings and exotic loans that should never have existed, but the model still works great. We built too many homes, but the overhang is being absorbed. Already, here in the DC area the inventory overhang has been mostly absorbed and we have gone from being a buyers market to being a neutral market.

Most of all, it doesn’t show how much equity extraction happened. Between cash-out refis and consumer (credit card) debt refinancing, MEW was a huge factor in the 70%-consumer-spending-driven US economy. Ex-MEW, the US had only one year of per-capita GDP growth from 2001 onward.

However, UK prices are rising and have been since April, due to a shortage of supply. Irish prices are falling and are likely to do so for some time yet in some parts of the country, where overconstruction in the boom years led to about 12 years supply to be built in just 7 years (see for example the graph here http://bit.ly/7d1MmF and graph on the top of page 4 here http://bit.ly/8dD9dL).

Markets are all about supply and demand – the financing of demand was a huge factor in the housing market bubble, but supply booms are hugely relevant, especially in places like Ireland, Spain and the Gulf.

I’m guessing the same reasoning applies to China’s relatively mild-looking graph–the craziness of its coastal cities was mitigated by the inland regions (This is only a guess, someone please correct me if they know otherwise).