That's not an acceptable answer even if it does happen to be true. In
politics it ALWAYS has to be someone's fault, and it's ALWAYS the
other guy. If the economy is really so bad, I'd like to know who
these people are bidding up the price of housing to stratospheric
levels.

The Federal Reserve.

Home buyers are the ultimate "payment buyer." The percentage of folks writing
out a check for $468,900 to move into a rickey-tickey cul-de-sac clone 40 miles
from town in "New Westchester Estates" (or some other pretentiously named
community) is likely to be in the low single digits. Even if you can afford to
pay cash for housing, the interest rates make it more atractive to borrow.

Housing prices are no more logical than were the prices of stocks in 1999.
"It's worth it because that's what the last guy paid for the same offering, and
it's going up in value so fast we have to buy now or we'll never afford it
again!"

While declining interest rates have allowed payment buyers to pay some very
high prices for housing of late, those same interest rates cannot continue to
fall. My wife recently mentioned to me that the overnight Fed Funds rate is
hovering around 1 percent. That has to be about the bottom, unless investors
are going to be willing to pay to have their money stored for them. :-)

When those interest rates start to rise, as they will to cover the cost of the
Iraq invasion and attract investors to cover our
record national debt, housing prices could be a short-term victim. People might
want to move to a newer, nicer, house but if stepping up $100k in mortgage
balance at a higher interest rate changes that just barely doable $2500 a month
mortgage note to $4100, a lot of people will decide to
"stay put" instead. At that time, those who
*must* sell will have no choice except to dump the price as low as they can
manage to go, and that will bring the price of all similar houses down as well.

Higher end houses in areas with a lot of unemployment have not appreciated at
all, and have declined in supposed "value" in many cases. Seattle is a good
example.
Our own place is a humble little tarpaper shack, of course, but our run down
dump is surrounded (by outraged neighbors) in one of the priciest districts in
town. We couldn't afford to buy even our meager little hut if we moved to
Seattle today, but we have lived at our present address about ten years.

As the dot.com boom roared on, housing prices in our neighborhood of 100-year
old
wood frame houses blew clear up into the seven digit category. We were shocked
when prices crept up to this level, but the houses sold fairly quickly and in
many cases before there was an advertised reduction in the listing price.

Some of those "Million dollar" houses have since resold. The one on a corner a
block away started at $1.1mm, dropped to $950k, dropped to 895, 875, 845, 825,
and finally $795k before the "SOLD" sign went up. $795k was less than we
remember the house advertised for when it last sold- so it's likely the latest
reseller sacrificed some of his initial down payment just to get rid of the
house at this point....and of course just forget any "appreciation."
Some houses in the neighborhood have started extremely high, dropped a few
steps, and then been withdrawn from sale.

Low end houses (meaning in the low six-figure category in W. Wash) have held
their own and shown some appreciation in this region, but there is a lesson to
be learned from the decline in prices for the
highest priced homes....the price of a house is not supportable unless it is
affordable to enough buyers to create competitive demand.

When the mortgage rates rise much faster than wages, something has to give way.
Price is usually that something.
Remember that when 5% mortgages go to 6%, the interest rate has gone up only 1%
but the cost of money has increased by a factor of 20%....(6 being a number
120% as large as 5). With workers having to strike to get 2, 3, or 4% annual
raises these days, (and many others willing to forego any sort of raise and
just grateful to be working at all) an overnight 20% increase in the cost of
*anything* will put a damper on demand for that item.