Charles Hugh Smith – Markets discover price via supply and demand: Big demand + limited supply = rising prices. Abundant supply + sagging demand = declining prices.

Eventually, prices rise to a level that is unaffordable to the majority of potential buyers, with demand coming only from the wealthy. That’s the story of housing in New York City, the San Francisco Bay Area and other desirable locales that are currently magnets for global capital.

In the normal cycle of supply and demand, new more affordable housing would be built, and prices would decline.

But that isn’t happening in hot real estate markets in the U.S.  What’s happening is rental housing is being built to profit from rising rents and luxury housing is being built to meet the demand from wealthy overseas buyers.

With limited land in desirable urban zones and high development fees, it’s not possible to build affordable housing unless the government subsidizes the costs.

Meanwhile, the supply of existing homes for sale is limited by the owners’ recognition that they won’t be able to replace their own home as prices soar; it makes financial sense to stay put rather than sell and try to move up. Continue reading →