House-Price Momentum: The Good News

John Authers looks at what drives house prices:

Tim Bond of Barclays Capital points out that once house prices start to accelerate, people expect them to keep on rising at that rate. All other factors are swamped. As he says: "After a period of strongly rising prices, the expectational component comes to the fore and becomes the key factor determining real house prices."
If people see house prices rising, greed trumps everything else. In the short-term, this is a self-fulfilling prophecy.

The interesting thing is that this mechanism does not work in reverse. The unique thing about bull markets in housing is that fear and greed both mitigate in favor of higher prices. The greedy want to make money, like they always do. But the other huge factor is the fearful - people who are watching prices rise inexorably and who feel that if they don't buy now, at any price, they'll never be able to afford something.

In a bear market, by contrast, fear of falling prices is a very small factor in house-price depreciation. Once someone owns a house, it's very uncommon for that person to sell just because they think prices are going to fall. Meanwhile, there are still speculative buyers out there - people who think they can use the current weakness in the markets to pick up bargains, often out of foreclosure.

Which is why there's every reason why house prices rise in a bull market, and fewer reasons why house prices fall in a bear market: foreclosures and oversupply are the main technical reasons for price drops. In turn, that might help explain why Manhattan seems to be immune from the housing bust (for the time being): neither is a factor here.