Two weeks ago I wrote about all the ways people explain the very high housing prices in a place like Portland, Oregon and why I found those explanations lacking. While Portland is nice, it's not so extraordinarily nice as to defy natural market mechanisms. Portland could build more housing, but there's no evidence that housing is not keeping up with demand at current prices. Yes, Portland is cheaper than San Francisco, but so are a lot of places that are not experiencing such huge distortions. And there is decades -- perhaps centuries -- worth of developable property within the current urban growth boundary; the UGB is not creating an artificial scarcity.

So what is going on?

There are two parts to this conversation. One is psychological and one is financial. I've chosen to deal with the financial today and will tie in the essential psychological element in a follow up. To explain the financial, I'm going to present a hypothetical situation that I've seen in Portland as well as other bizarre housing markets like Austin, Texas (where I'll be this week) and Northern California.