After rising steadily during the first four decades of the post-World War II era, the homeownership rate began declining in the early '80s. High mortgage rates and mind-boggling prices put buying a home out of reach for many families. Potential buyers also fled the market when housing prices collapsed in many metropolitan areas. Some economists, such as Harvard professors David Weil and Gregory Mankiw in a 1989 study, predicted that the late '80s decline in residential real estate prices signaled the start of a long-term downward spiral in home prices, after adjusting for inflation. Among the most important factors are low interest rates.
Low unemployment is another factor.
Households have never been more financially flush, thanks to the long economic expansion and strong productivity growth. Immigrants, who are flocking to America in record numbers, are eager homebuyers. Mass. Economists at Regional Financial Associates take another tact. On the supply side, they argue that homebuilders will cut back on construction if demand slackens. On the demand side, the most important factor driving the housing market is the growth in household income.