End of the real-estate-driven boom economy

I haven't read the paper referred to here, but have been generally puzzled why no one has raised the issue of changing tax policy to allow “rollover” of a home's capital gains into a new house.  This one element, it seems to me, has made a huge difference.  Investing in a house, financed by debt, is now so much more tax-efficient than other investment, contributing to a much greater turnover in homes -- driving up house prices to accommodate increased demand in a cycle that encourages more turnover as the house value appreciates.

This change was reinforced by a shift to home-equity loans as the primary financing source for families -- mortgage rates being much cheaper than any other loan type (especially credit cards!).

I believe that this shift is now priced into the market and people are maxed out on the amount of mortgage they can cover.  But this pricing into the market was papered over by “financial innovations” (isn't subprime lending little short of loan-sharking?), as lenders sought to expand the market for longer.

Now, it is priced in.  People asset-value/debt-payment levels are evened out and the subprime collapse shows that the market went to far to sustain itself.

There will be no return to these past “glory days” of real-estate now.

Oh -- in Oregon, the market hasn't been hit as badly.  Some people say that's because we have a different economy here and it didn't get overblown and we won't be hurt as badly.  BS.  We just have a have trailing economy so the boom started later, won't go as high, and will end later.

Yes, they are right to worry:

Re: Inside the Mind of the Fed - New York Times:

In total, [the two recent Fed papers] constitute an admission that the Fed was surprised by the housing and borrowing boom on the upside, and now fears it will be surprised on the downside.

One paper, by Karen E. Dynan, a Fed economist, and Donald L. Kohn, the Fed’s vice chairman, asked why a strong economy had left Americans deeper in debt than ever before.

“The most important factors behind the rise in debt and the associated decline in saving out of current income have probably been the combination of increasing house prices and financial innovation,” they concluded. In other words, Wall Street and rising home prices made it easier to borrow more money, and consumers did so.

That led to more consumption than would have been expected. Now, the authors say, “an unexpected leveling out or decline” in home values could have the opposite effect.