mish: " Nonsense, Price can not rise above peoples ability to pay for them, at least for long."
That is why housing is crashing now.
If wages do not go up, prices of housing will continue to drop regardless of what the cost of materials is.
Simple economics."
koan: Well, not quite so simple. The sub prime debacle is just that, a sub prime problem. The banks were loaning to people who cannot pay, or were engaging in speculation; and were also sold short term variable rates that rose quickly.
But if inflation rages and the difference between the cost of an existing house becomes too low compared to the cost of building a house then peopel will notice this and step into buy value. Inflation will affect this differential.
I agree that people cannot afford houses they cannot pay for, but that is why I believe when new house are built again they will have to be built cheaper, because I do not see wages rising much with the demise of unions, massive new competition of cheap labor (immigration) and companies moving to cheap labor countries. We are becoming a hamburger stand economy with a taste for steak.
But one mistake people make all the time is thinking there is a 1 to 1 direct correlation between "simple" wages and housing prices. Although I think that is basically true in the main, people can often afford more than people think because they have the savings to put larger down payments.
It has been my observation over 16 years of selling real estate that houses sell below cost when there is a glut of houses for whatever reason and I have seen this scenario before.
But once that glut is absorbed by the market, then the price of a house is related to cost. Period. And that means inflation becomes an overriding variable. If wages do not rise, as mentioned, then cheaper houses will be built.
If inflation is raging many people will find money (investment or otherwise)to buy when they see too big of a differential between real cost of houses and market price.
I have several friends right now looking to buy in the Washington, Oregon area while prices are down a bit and interest rats are low because they can see that up ahead both housing costs and interest rates are going to rise.
In fact when my town had a big housing depression in the late 80's I put a partnership together and we bought a lot of houses very cheaply and rented them out until the market rose back up and then we sold them at a big profit. Some houses (condo's and attached homes) rose 500%.
We had a glut and prices went way below replacement cost and building stopped. Then when prices started to rise due to a shortage in housing and new building began housing costs were directly related to new housing costs.
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