HOUSING BUBBLE WATCH….Will housing prices keep falling until they get back to their pre-bubble value? Brad DeLong doesn’t think so:

The rise of Asia and the resulting demand by the rich and by governments for U.S. assets to hedge political risk is likely to keep savings glutting for decades. We aren’t buiding more superhighways, there are no major transportation improvements on the horizon, America is filling up, and so land-value gradients are on the rise. If the income distribution continues to erode, we will wind up with higher prices for scarce positional goods — chief among which is location, location, location.

My guess is that we will ultimately give back half of the doubling…

I think that’s right, and I’d add the fact that rising average earnings have, over time, increased the percentage of income that families are willing (and able) to spend on housing. Different regions will react differently, and prices everywhere still have a ways to go before the housing market bottoms out, but I doubt that the national average will ever get all the way back to its circa 2000 level.

This is, by the way, both good news and bad. The bad news is that housing prices are probably going to end up permanently higher than they were in the past. The good news is that the market will bottom out a little bit sooner than the most pessimistic estimates would have it, which is the first step toward recovery and stability. Every silver lining has a cloud, and vice versa.