In any case, if the housing shortage story were true, we would see it in rents first and housing prices second. Instead, rental rates have been functionally flat for almost five years now, certainly not indicative of a housing shortage. Many bulls respond that the rental markets cannot be used as a basis for discussing housing since there is an intrinsic value to owning that we callous economists can’t possibly fathom. I agree that there is an intrinsic value, but has it increased by $200,000 in 3 years?From an expectations perspective, I know many people who bought houses because they thought prices were going to appreciate and if they waited they would not be able to afford a house next year. This expectation of rising prices increased demand for ownership, increasing prices even more. I don't think that people expect prices to keep rising any more -- the paper in DC last week was filled with people saying "now that I bought at the top of the market, what do I do?" -- and it's pretty easy for the marginal buyer to decide that renting for a few more years is just fine.
On a similar note, someone I know had a $100K interest free loan for housing as part of a compensation package involving a move to California (in return for 10 years with the firm). Initially I thought this was a pretty good deal, but now that I think about it, I'm not sure I want to buy real estate in California no matter what financing I was offered. Would you buy something that you think would decrease in value ~30% even if you could borrow money to do it at 0% interest?
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