Barry Ritholtz linked to a NY Times article by David Leonhardt.  Concerning housing, Leonhardt wrote:

But I do want to suggest a framework for figuring out whether you lean bearish or less bearish: do you believe that housing is a luxury good and that societies spend more on it as they get richer? Or do you think it’s more like food, clothing and other staples that account for an ever smaller share of consumer spending over time?

If you believe housing resembles a luxury good, then you’ll end up thinking house prices will rise nearly as fast as incomes in the long run and that houses today aren’t terribly overvalued. If housing is a staple, though, prices will rise more slowly — with general inflation, as food tends to.

Leonhardt argues housing is a luxury item, arguing that the 30 year period from 1970 to 2000 (during which housing values rose consistently) was not an aberration, that it represents a normal outcome of a society growing wealthier and hence spending more on housing. 

After digging into it, I come down closer to the luxury good side, which is to say the less bearish one. To me, housing does not rank with unemployment, the trade deficit, the budget deficit or consumer debt as one of the economy’s biggest problems.

Ritholtz makes a different case:

 . . .let’s remind readers why I believe the 1970 – 2000 housing boom was aberrational.
It was not merely tax breaks and falling interest rates, but a massive bond bull market. Mortgage rates did not simply fall, they were driven down by two/thirds, from over 15% down to under 5%. With Fed rates now at zero, this simply cannot occur again — unless we see a wild spike to 1982 levels and 15% mortgages (and what would THAT do to prices);

What other factors made that period so unusual? Consider these elements:

• Post WWII suburb creation was occurring; Baby-boom demographic was surging (both are now over);

• Rampant credit expansion has ended; (De-leveraging is now occurring).

• 3 decades of decreasing credit cost powered (in part) Real Estate appreciation;

• The 18 year bull market in stocks goosed wealth creation; it provided ready cash for RE purchases; (Unlikely to re-occur again any time soon);

• The RE top of 2006 pulled forward a decade or more of future returns; (Its now only four years since the top);

• When rates eventually start going higher, it will be a a headwind to price appreciation;

• From 2001 – 2007, new home building far outstripped new household formation; (we are still saddled with supply in excess of households);

• Home ownership rates increased from 62% in 1960 to 69% as of 2005; Its now 67% (Source: Census Data);  (Ownership rates are going down as those who bought homes they could not afford move back to rentals); 

• Traditional metrics — Median income vs median home price, or Housing Equity as a percentage of GDP or Rent vs Own — still show housing as 5-15% overvalued

• Over building overwhelmed demand with Excess supply;

Last, and perhaps most important, people pay for Homes with income from jobs. If over the next few years, we continue to see a sub-par recovery, with job creation lagging, and real incomes falling, then all Housing bets are off.

As the baby boomers kids move out and they fact empty nests, they’re going to be looking to downsize.  That means lots of demand for smaller homes and condos, falling demands for six bedroom mcmansions, which will translate into a housing glut.  Add to that the excess supply from overbuilding in the last decade and you have a recipe for a long bad period for the housing market. 

Another important point is that the US demographics have changed in recent years.  The postwar boom was fueled by a number of unique historical factors and while some of those can be recreated, i.e. strong unions, positive economic policy at a national level as opposed to the budget policy of the last few decades, some cannot.  Part of that boom was fueled by a pent up demand for housing; I wonder if we reached a point where the development of ever more suburbs ever further from the population centers is going to become a losing proposition. 

About 1/3 of Americans rent and 2/3 own their housing.  Re-urbanization might not be a bad thing – but I say that as someone who likes living downtown, who likes being able to park my car on Friday and have the option of not driving until Monday and still being able to run my errands and go shopping.

•