Housing prices have to make sense on both the demand side and the supply side. No matter what you do or don't believe about the ability of crazed demanders to bid up prices, you still have to explain why competitive suppliers don't bid those prices right back down. In other words, if the housing market is so tight that builders are making a fortune, they ought to be flooding the market with new houses—and driving down prices
The builders (suppliers) are flooding the market with new housing units. For example, look at Miami where "In Miami, the construction crane could become the new state bird as some 25,00 new units are punching into the skyline - with another 40,000 on the drawing board. (Christian Science Monitor, July 8, 2005)". Not satisfied? In California, "Home builders beat a record established in 1989 by starting construction on more than 16,000 homes in June, the California Building Industry Association announced Thursday (EastBay Biz Journal, July 25, 2005).
For the past three years 1/3rd of the new units added are lying vacant and in the past six months 2/3rd of the new units added are lying vacant. At some point the reality of the Supply and the Demand for housing (as in living in a house and not speculating) will assert itself and all the speculative buyers will have
hell to pay." ( Financial Sense 7/31/2005 )
The home construction industry is building, and building fast. There is no housing unit supply shortage. Furthermore, if there was a shortage of housing units in the bubble markets the rental prices would be exploding in the bubble cities. This is not the case. Generally, rents in the bubble cities have barely kept up with inflation. There is no housing unit supply problem. Demand is the issue, as the demand curve has shifted to ridiculous levels due to the 'speculative fervor.'
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The bigger this becomes, and the bigger the fall. It will be blood in the streets.
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