John Wake

Why Did Housing Go into a Bubble?

A question for me was why did housing prices boom while the general inflation level did not?

I think it gets down to the amount of money chasing a fixed amount of goods. For several reasons there was money available to buy homes that wasn't available to buy cars, stocks or anything else. You could get a home loan without having any income but you couldn't finance the purchase of a washing machine without having a job. That money had to go to housing, it couldn't go toward other purchases (except indirectly). So there was a lot of money chasing homes and housing prices skyrocketed.

There were, of course, other factors but I think "money chasing goods" was the top factor.

The Anticipated Prime Mortgage Problem Has Arrived

Great analysis of the supply side.

Now, let's talk about the demand side or, rather, the quantity demanded. The prices are so low and the number of sales is so high, in Phoenix for example, that markets are clearing. In a several low cost areas of Phoenix, the quantity demanded is so high that they could clear MORE supply.

To give you an idea how crazy the market is in Phoenix, let's look at homes sold within the City of Phoenix, not metro Phoenix. The median sold price was $64,000 in March. That means, of course, that half the homes sold for $64,000 or LESS. By June the median price in the City of Phoenix increased to a whopping $78,000. (Based are Arizona State University data.)

Prices are so low in a several zip codes in the City of Phoenix that the quantity demanded has exceeded supply and prices have increased. At their current price level, those zip codes could likely clear continued high levels of foreclosure supply and, indeed, prices have likely bottomed out in those zip codes already.

Prices, however, haven't fallen to that point in most metropolitan Phoenix zip codes and at current prices the quantity demanded is less than the supply.