In past columns I've written about the impact of the "real estate industrial complex" and the over-sized import that housing has on our economy. Along these lines, there is a very interesting Paul Krugman article in today's NY Times entitled, "That Hissing Sound".
Krugman's central point is that, when the housing bubble ends, it will not happen as it did for equities on Black Monday...where prices fell by 23% in one day's trading. It will come much more slowly...in the form of falling sales and rising inventory. Moreover, he builds the case that this is happening right now.
Krugman draws an interesting contrast between the areas in the country that he characterizes as the "Flatland", versus the "Zoned Zone." In the Flatland, the great midsection of the country, it is easy to build houses. When demand for housing rises in the Flatland e.g. Houston, Denver, Atlanta...new construction has not been concentrated in the urban core areas, but in the sprawling suburbs and exurbs. Here, housing prices are largely determined by the cost of construction.
In contrast, in "Zoned Zone" regions, which lie along the coasts, high population density and land-use restrictions make it difficult to build new houses. Krugman's points out that Zoned Zones are much more prone to housing bubbles.
In the nation as a whole, housing prices rose 50% between the first quarters of 2000...and 2005. During this same time, Flatland metro areas like Houston and Atlanta saw prices rise 26 and 29% respectively. In comparison, housing prices in New York City rose 77%...Miami- 96%...and San Diego-118%.
Krugman concludes the piece by indicating that bubbles end when people stop believing that big capital gains are a sure thing. In San Diego, the number of single-family houses and condos on the market has doubled over the past year...and homes that sold overnight are now on the market for weeks. Additionally, given the import of housing on the entire US economy i.e. residential housing is 16% of GDP, no geographic region of the US would be immune to the bubble's burst.
One interesting side note. Do you recall the 1999 bestselling book, "Dow 36,000"...which was published at the top of the stock market frenzy of the late '90's? The author, Kevin Hassett, is now among the most vocal proponents of the view that there is no housing bubble. Timing, or the lack thereof, is everything!
However, Paul Krugman's article makes me more inclined to recall the closing phrases of T.S Eliot's, "The Hollow Men"...
"...This is the way the world ends, not with a bang but a whimper."
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