Paul Krugman writes:
Permanently high home prices? - Paul Krugman - Op-Ed Columnist - New York Times Blog: Brad DeLong is of the belief that home prices won%u2019t fall back to pre-bubble levels, because "America is filling up" and "we will wind up with higher prices for scarce positional goods--chief among which is location, location, location."
The trouble with this argument is that it's an argument for rising rents as well as rising prices -- and if you believe the BLS data, that just hasn%u2019t happened nationally. Below are the Case-Shiller home price index and the BLS index of "rent of primary residence", both adjusted for overall CPI and expressed as indexes with Jan. 1987=100. Bottom line: rents have hardly risen at all in real terms.
Now, maybe the BLS is wrong. But for what it's worth, the data say that essentially all the rise in real home prices came from a rise in the price-rent ratio, which suggests that things will go right back to where they were.
The "rents" argument applies to the "filling up" part of the argument, but not to the "foreigners want to invest in America and that will keep interest rates low for a long time" argument.
Abd I am less confident in the BLS than Paul is. Don't get me wrong--they do a superb job on a shoestring--and maybe I spend much too much of my time in unusual and unrepresentative places, but I am almost as unhappy with the rental price index as I am with the software price index.