Zoning In On The Housing Bubble

New York Times columnist Paul Krugman often ponders the magnitude of the housing bubble, and tries to explain it to those who would be fooled by the spinmeisters. He is one of the great voices of reason in a stadium filled by blowhards with bullhorns. This week Krugman's focus is on the seeming contradictions in data about the housing market — How can it be crashing if all these national averages look so favorable? Here's an excerpt:

When discussing housing, we should think of America as two countries, Flatland and the Zoned Zone.

In Flatland, there is plenty of room to build, so house prices mainly reflect the cost of construction. Therefore, Flatland is fairly immune to housing bubbles. And houses there have become easier to afford since 2000 because of falling interest rates.

In the Zoned Zone, lots for building are scarce, and house prices mainly reflect the price of lots, rather than the cost of construction. As a result, house prices in the Zoned Zone are much less tied down by economic fundamentals than prices in Flatland.

By my estimate, slightly under 30 percent of Americans live in the Zoned Zone, which includes most of the Northeast Corridor, coastal Florida, much of the West Coast and a few other locations. So Economy.com’s results on affordability aren’t surprising: Most families live in Flatland, and haven’t seen a big rise in the cost of home ownership.

But because Zoned Zone homes are much more expensive than Flatland homes, the Zone looms much larger in the housing story than its share of the population might suggest. By my estimate, more than half of the total market value of homes in the United States lies in the Zoned Zone.

And because home prices have risen much more rapidly in the Zone than in the rest of the country, the Zoned Zone accounts for the great bulk of the surge in housing market value.

This is an excerpt. Krugman's entire column is at this link.
— The Boy in the Big Housing Bubble