When Paul Krugman isn’t writing nonsensical columns praising welfare statist intervention in Canada or France, he can sometimes write interesting columns. His latest one on the housing bubble was quite good. Although he doesn’t acknowledge that Fed policy is responsible for it this time (which would mean a implicit endorsement of the very “hangover theory” he years ago dismissed as the economics profession’s version of the phlogiston theory of fire), he notes several interesting facts.
First he points to how the bubble is mainly concentrated to some areas with high population density and/or land use restrictions , like the California coast, Las Vegas, New York, the DC area and south Florida, and how this contrary to Alan Reynolds’ assertions makes the problem with the housing bubble bigger than national averages would suggest. Moreover he points to how the sharp house price increases have made it more expensive (Government inflation statistics will of course ignore that cost increase) to live in a house you “own” (i.e. purchased with borrowed money) rather than to live in a rented house, something which is particularly true in the particularly overheated areas mentioned above. In San Diego for example it is now 2.5 times more expensive to “own” a house than to rent it.
He then goes on to suggest that the housing market is now cooling citing anecdotes from San Diego about how it is now more difficult to sell houses. The view that the housing market has peaked was also supported by Mark Thornton in LRC yeasterday. One indicator that I like to look at, Commercial bank lending to real estate, has however not slowed down. During the latest year ( 52 weeks), it has increased 15.4% and during the latest 13 weeks the increase has been 15.1%. Thus we are not seeing any significant slowdown in that indicator. I am therefore not convinced that the U.S. housing market has slowed in any significant way (like housing markets in Britain and Australia has)-yet.
However, as prices have increased to more and more unreasonable levels and as the supply of houses increase with the construction boom (In the latest GDP report residential construction spending was a record 5.98% of GDP compared to the 25-year average of 4.5%)and as interest rates (even long-term bond yields recently) are rising, the end is not far away.
