A look at housing cycles outside the United States yields four lessons. First, valuations in the overheated US markets on the coasts have risen to extremely high levels. Relative to per-capita GDP, a typical home in San Francisco now costs much more than one in London. The only precedent we can find for current San Francisco valuations is the Tokyo market of 15 years ago.
Second, a weaker housing market is likely to weigh quite heavily on GDP growth. This is the lesson from the Australian experience over the past year, where consumption has slowed sharply in an environment of stagnating home prices.
Third, the foreign evidence suggests that it is probably still too early to expect a major US housing slowdown. House price declines are generally preceded by a rise in mortgage rates, often by several quarters.
Fourth, if the US boom does continue for a while longer, this would sharply raise the risk that the hot coastal markets become so overvalued that lower interest rates could not stem the declines.