Tax incidence

The WSJ op-ed says that the housing crises is over, and prices will stop dropping. Why is that?

[I]f one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

I'm not sure if this is actually true (would you pay more for a stock of Amazon.com if your broker gave you a great deal on your margin account?) but it certainly is how people have behaved. All of the cheaper financing that financial "innovation" created for house prices went directly into the price of those assets, so buyers were no better off before, and all the benefit was captured by previous owners. Similarly, when you hear about new government plans to help the first time homebuyer, all they will do is transfer more money to current homeowners, since the benefit will directly be factored into a new (higher) price. See this in action in my favorite graph below:



The other part that's kinda neat is how expected future appreciation makes current cash flow considerations unimportant. In the Real Bay Area, where I live, you cannot make up the price of a house in rent, buying a house and renting it out is a cash flow negative exercise, but price appreciate has more than made up for that. What happens when price appreciation stops, or goes negative? (Note: that has not happened in the Real Bay Area yet) No one knows, the graph only goes to 3% annual appreciation.