Paul Krugman of the New York Times has a great post today on why home prices could revert to pre-bubble levels:
Brad DeLong is of the belief that home prices won't fall back to pre-bubble levels, because "America is filling up" and "we will wind up with higher prices for scarce positional goods—chief among which is location, location, location."
The trouble with this argument is that it's an argument for rising rents as well as rising prices—and if you believe the [Bureau of Labor Statistics] data, that just hasn't happened nationally. Below are the Case-Shiller home price index and the BLS index of "rent of primary residence," both adjusted for overall [consumer price index] and expressed as indexes with Jan. 1987=100. Bottom line: rents have hardly risen at all in real terms.
Now, maybe the BLS is wrong. But for what it's worth, the data say that essentially all the rise in real home prices came from a rise in the price-rent ratio, which suggests that things will go right back to where they were.
You can check out the chart here.
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