Housing Bubble Explained: On a Napkin
A: Check out this post I saw on Matrix today. It references a post by Dr. John Rutledge on his Rutledge Blog that was written back in Spring of 2005, but as pointed out by Jonathan Miller, has relevance today.
Key point:
A drop in interest rates will make a permanent increase in housing prices but, over time, the growing housing stock will mitigate some of the price and construction pressure, which means the initial burst of activity, and possibly of price, are likely to moderate somewhat over time.
Leading To Conclusion:
So interest-rate induced housing inflation is largely a one-time event. It is not property inflation. It is not a housing bubble.
Housing inflation, as opposed to one-time increases in home prices, happens when there is a continuous increase in demand caused, for example, by systematically inflationary monetary policy. We do not have that today.
There were good reasons why home prices increased over the past two years. But don't get caught in either the trap of believing they will continue to rise, or that there is an unavoidable housing bubble. Prices will be relatively flat over the next year.
So far he is dead on!
~ Genius on a Napkin: Housing Boom Phase Diagrams
~ Geek Think: Housing Boom Diagrams