Soberlook had a recent post on housing rent that serves as a great starting point into the problem of conceptualizing the conundrum of the housing market in the current context. They point out that household formation continues to be slow, along with recovery in home building, and the problem appears to be a supply problem, as rent continues to outpace wages, pricing renters out of the housing market:
The tricky thing to think about here is, how do we increase supply? By paying the builders to build more homes. How do we do that? Well, the clear bottleneck right now is the real estate credit market, which has flat-lined for 7 years.
Housing supply will rise when housing credit comes back. And this will likely coincide with a significant increase in home prices.
So, to make houses more affordable, we need to make them more expensive. I doubt I'll be winning any elections with that slogan, but I'd be happy to have someone explain to me how it's wrong. If anyone wants to try, please keep in mind that prices of durable assets have denominators.
I have argued that when the real portion of long term interest rates declines, this should actually make the equilibrium mortgage payment go up. So, if rates increase due to an increasing inflation premium, we should justifiably be at the top of the range. And, keep in mind that, ignoring any changes in the inflation premium, real long term rates can go up more than a percentage point and still be at historically very low levels.