Living in a Bubble? [NYT]
Readers respond to Paul Krugman's Jan. 2 column, "No Bubble Trouble?"
Stephen Distinti, Brooklyn, N.Y.: I am writing because I would like a little clarification on your comparison between the state of today's housing market and that of the early 1980's. I understand your two central claims: one, that there can be said to exist two housing sectors, which you have termed 'Flatland' and 'Zoned Zone'; and two, the high proportion of one's monthly income needed to maintain a mortgage in the Zoned Zone is indicative of a housing bubble localized to those markets.
But here my own lack of knowledge in economic history, and my age, betray themselves: If the proportion of monthly income demanded by a mortgage in the Zoned Zone corresponds to the levels of the early 1980's, does the bifurcated nature of the housing market correspond to the 1980's as well? That is, in 1980, did we see the same situation, in which there was a Flatland, where home ownership was relatively accessible, and a Zoned Zone, where for most people owning a home was as out of reach as it is today? My impression is that in the 1980's the expense of home ownership was more evenly spread across the country, due perhaps in part to the fact that most major cities were still in a state of decline, a trend that has certainly reversed for several major cities, like New York.
So was there a Flatland and a Zoned Zone in the 1980's? If so, were their regional locations the same as today's? Does the fact of urban renewal have an impact? And if there was no such divide in housing markets then as today, would that suggest that the cooling of today's housing market will have an economic impact different from that of the 1980's?
Paul Krugman: Today's market actually looks very little like that of the early 1980's. What happened then was that the economy was coming off a period of very high inflation. The Fed drove interest rates very high in an effort to bring inflation under control. (It succeeded, at the cost of a period of very high unemployment.) And those high interest rates made housing unaffordable everywhere. You can see this in the charts that accompanied last week's article by David Leonhardt, which provided a lot of data online. In Flatland cities like Atlanta, the cost of home ownership as a percentage of income is well below its early 80's peak. In cities like San Diego, ownership costs are at record levels.
So there's no real precedent for today's situation, except maybe the sort of localized housing bubble/boom in Southern California in the late 80's. And international experience: Britain seems to be about six months ahead of us on the bubble curve.
Paul Harrison, Washington: Just a thought -- to what extent does your analysis take into account the change in urban cores? Call it revitalization or gentrification, your choice. Fort Greene in Brooklyn is a perfect example; homes built by the upper class fell into slum status but have now been restored along with their neighborhood. Obviously their prices have soared; some increase had to do with general market appreciation and some with specific capital investment in those neighborhoods. This is a trend that did not really exist during the last housing bubble.
Paul Krugman: Gentrification is a real factor, but smaller than those of us who tend to hang around central cities might imagine. A more economistic answer is that rents in the boom cities haven't gone up all that much. This tells us that the underlying demand for housing hasn't soared, just the prices.
Ross Grannan, Falls Village, Conn.: Let me say first that I am a real estate appraiser and geography major, so I consider myself somewhat of an expert. I like your zoned vs. flatland analysis of the housing market. I think it is a beginning, but I think what is going on much more complicated than enforcement of zoning laws. There are many reasons why governments make zoning and land restrictions ordinances and so on. This varies from the west coast, to Florida to the northeast.
On the West Coast, zoning restrictions are based primarily on the lack of water. Many of the smaller cities of California are restricting development based on the ability to provide water. Even where people are building outside of municipal water systems, a builder must prove that there is a functioning well that can provide a minimum of water for a home. I agree that the real estate prices in California seem ridiculous and are seemingly way out of bounds the rental market bears that out to some extent. I think, though, that any correction will be moderated by factors that really are environmental and based on long term sustainability. Many of the flatland areas — Nevada, Colorado, Arizona, Texas, Oklahoma — have promoted development that cannot be sustained I think the water issue will rear its ugly head in many places real soon. What is the value of property without water? This will be a question a potential buyer and certainly any lending institution should ask.
The Northeast market is even less likely to sustain a major adjustment based on the many factors, including zoning. Lack of water is not an issue for the Northeast Corridor, even though zoning is very restrictive. Land use planning in the northeast is based on primarily on population and actual ability to dispose of water in a fashion that meets local health codes. In my real estate appraisal area in northwest Connecticut, zoning is very restrictive and some towns are now enforcing 5-acre minimum lot sizes on top of restrictive septic system health code requirements.
Construction costs have increased dramatically in the last year based on the hurricanes, increased fuel costs and demand on supplies from foreign markets. Once again costs in the metro areas of Boston, New York and Philadelphia seem to be overpriced even though the rental market I think doesn't bear that out as much as on the West Coast. There has been an adjustment already; prices have stabilized. The difference is what people really value. Housing is cheap in the flatland areas for a reason. Building codes are less stringent, land use planning primarily revolves around the car and no thought is put into sustainability. I think there the reason people choose to pay more for housing in the zoned areas is quality of life, and these same people see the development in the flatland for what is cheap and disposable.
Paul Krugman: I agree with much of this comment, and I'm a dedicated Zoned Zone resident myself. But I don't believe that the relative desirability of, say, San Francisco as compared with Atlanta has soared over the past five years. And data on housing rents don't suggest that there's been a big change in relative demand for housing. It's really interest rates plus, I believe, price speculation driving the divergence between Flatland and the Zoned Zone since 2000.
J. Ullman, Weston, Mass.: You might wish to take your excellent analysis one step further by looking at the growing gap between rich and poor in the zoned zone population. In Manhattan, the contrast between the view looking south and that to the north from the vantage point of Park Ave and 96th St. speaks volumes, and clearly it makes no sense whatever to calculate the average housing costs of the two neighborhoods. This dichotomy is present to some degree in every major urban and suburban center in the zoned zone.
Paul Krugman: Indeed. But you shouldn't idealize Flatland, either. At least New York's transit system allows those who can't afford to live in the glamorous parts of the city to commute to jobs. Imagine being poor in a sprawling heartland city with no rapid transit and a poor quality bus system. Central New Jersey is part of the Zoned Zone, but less expensive than the city; still, manual workers can't afford to live anywhere closer than Trenton, and I can't imagine how they get to their jobs.
Daniel K. Cooper, New York: As usual, I enjoyed your critical commentary in your piece this morning on the housing bubble — and I share your perspective that local markets are what matter, and that the national data may obscure as much as they illuminate.
But a question on the measure of the bubble — e.g., the proportion of median income to be paid to finance a median-priced home. If the Zoned Zone is where this proportion is highest, it is also where financially able people take second or third or fourth homes. Often, of course, this is the super-rich, the value of whose residences are at the upper extreme and have little if any influence on the median home value. But this pattern would also include the upper middle class who have a studio apartment in Manhattan as a pied-a-terre, or a winter condo in South Florida or southern California. In terms of value these properties would be much further from the extremes and would have a much more serious influence on the median price of a home in the region.
To the degree that this is the case, I submit that using the median income of the region as a benchmark for measuring a housing bubble is quite imperfect — that a more appropriate benchmark would take into account the fact that for some proportion of home buyers the appropriate benchmark is the median income of households nationally that are in the market for second or third or fourth homes elsewhere in the country.
Would you concur, or am I overlooking something? Possibly the proportion of home buyers like I describe here is too small to have a sizable impact on the measure of a bubble — but are you aware of any data to allow for an assessment of this?
Paul Krugman: What great comments I'm getting here! My guess is that pied-a-terres are very rare, even though I personally know lots of people who have them. But I really don't know. And my understanding is that housing data are much less informative than we'd like. |
