Economists who predict underperformance in real estate based on Baby Boomers downsizing are overlooking another huge demographic trend.

The market is looking much improved today, with home sales and prices heading up. But within this improvement are the seeds of a long-term challenge: falling inventories.

The inventory of homes for sale peaked at 4.5 million units in 2007, fueling the big drop in home prices that we’ve seen. Today, we have the opposite problem: Only 2.49 million homes are for sale, even though demand has risen some 10 percent from a year earlier.

A truly healthy housing market boom occurred between 1940 and 1960. Supported by Fannie Mae as a quiet, behind-the-scenes government corporation, the home ownership rate grew from 40 percent to 60 percent. The company provided liquidity for FHA mortgages and for U.S. Veterans Affairs’ zero-down payment mortgages for returning World War II soldiers, which helped fuel the growth...