Housing prices aren't what they are because of inflation. They are what they are because of restrictions on creating more housing units. If there was more housing on the market then the price would go down and people would spend less of their money on housing. Urban housing prices have increased faster than overall inflation simply because we're not building enough of it.
Where does the demand-side elasticity come from? Unless the decades-in-the-making housing bubble actually pops, housing will always be a sellers' market. If the monthly cost of housing actually started tending towards the amortized cost of construction, the builders would immediately stop just as they did during the last mini-crisis. This idea that the "value" of housing should be continually skyrocketing is baked in our national religion!
It's the monetary policy that creates ever-more rope for people to hang themselves with. The debt<->collateral relationship is circular - every cut to interest rates / down payments directly increases the capital value by the corresponding amount. This has destroyed the idea of ownership, making it impossible to permanently get ahead of the treadmill.
(IMHO this economic weather is directly tied to the centralizing trend of communications technology growing the asymmetry of power that is ever-better at siphoning surplus away from individuals. Giving individuals the power to repudiate a mortgage while avoiding eviction would also correct prices)
> Where does the demand-side elasticity come from?
If you make more money available then housing prices go up to consume essentially all of it. But that's how markets with highly inelastic supply behave. Yet we can build arbitrarily many housing units. So why haven't we built more? Urban housing prices have been high for many years. Plenty of time for the market to react. Something must be preventing it.
> If the monthly cost of housing actually started tending towards the amortized cost of construction, the builders would immediately stop just as they did during the last mini-crisis.
Of course they stop when it becomes unprofitable. What would you expect them to do?
The problem is this: Increasing the supply of housing can cause housing prices to fall very quickly. From a social perspective that's what we want, but from a construction company perspective the last thing they want is to pay a lot for land that loses its value while they're holding it.
The way to mitigate that risk is to buy less land and build more housing on it. But if zoning regulations don't allow that then they build nothing. Hence the problem.
