Do you remember the real estate bubble? OK, if you’re 35 or younger, probably not – you were at most a teenager when the bubble burst. But it was a huge deal at the time, and a very strange one.
When the bubble inflated in the early 2000s, it seemed to me and others – Dean Baker was perhaps the first prominent economist to sound the alarm – that it did. most obvious bad pricing we’ve ever seen. At least the dotcom bubble of the late 1990s had the excuse that companies were developing exciting new technologies, so at least some of the new companies might end up becoming extremely valuable. But people have been building houses for thousands of years; what could justify these extraordinary prices?
At the time, however, anyone raising questions about housing was treated like…people now raising questions about cryptocurrencies. (After yesterday’s column went live, a friend on Wall Street texted, “God help your inbox.”) I got a lot of “You’re just saying he’s there’s a bubble because you hate President Bush.
Either way, the bubble eventually burst, taking much of the financial system with it. This is a worrying precedent, as house prices have once again risen rapidly. In fact, the average real house price in major markets is now higher than it was at its peak in 2006:
So is history about to repeat itself? Well, there are important differences between this house price spike and the previous one, differences that arguably make this one less worrisome.
An important feature of the house price boom of the 2000s is that it only affected certain metropolitan areas. When I wrote about the bubble in 2005, I argued that America was effectively divided between Flatland – places where it was easy to increase housing supply – and the zoned area, where “a combination of high population density and land use restrictions” made it difficult to build new homes. And the big price increases have only taken place in the latter. For example, here is a comparison over time between Miami and Dallas:
This distinction was key to my conclusion that we were in the middle of a bubble. By the mid-2000s, real house prices nationally had risen “only” by about 50%, a figure you could, with painful intellectual contortions, try to justify on the basis of interest rates low. But there was no way to justify the 100% or greater increases we were seeing in places like Miami and San Diego.
This time, however, it’s different. Look again at the Miami-Dallas comparison. As you can see, the new home price spike is much more of a national phenomenon, with prices rising as much or more in Flatland than in zones zoned along the coasts. Adjusted for inflation, prices in places that were the epicenter of the 2000s bubble are still below their previous highs (and their price rise is easier to justify, since interest rates are still lower now); The reason the national average is so high is that prices are rising everywhere, even in small towns that were once great bargains.
How is it possible? In the 2000s, home prices remained low in many places, despite growing demand, as supply was plentiful: building land was plentiful in both small towns and cities that, like Houston, don’t have much zoning.
This time, however, record house prices did not lead to a housing construction boom:
But why? With homes selling for so much, you’d think developers would have a strong incentive to launch new units, which they can do quite quickly. I can still remember driving around New Jersey during the McMansion boom and being amazed at how quickly the houses were going up. Why don’t the developers rush in now?
In correspondence, my former MIT classmate and economist Charles Steindel gave me the likely answer: it’s the supply chain, stupid. Watch what happens to the price of building materials:
Prices therefore skyrocket, even in places where there is plenty of building land, because supply cannot increase to meet demand.
Put it all together, and the case for a bubble isn’t as compelling as it was in 2005 or 2006. That doesn’t mean all is well. Real estate agents I know tell me there’s still a sense of unhealthy frenzy, and people who paid high prices for small-town homes might regret it once supply chains are disconnected and more houses will be built.
But this time it’s different, even though some real estate prices are starting to look like the bubble of the 2000s. I wouldn’t say all is well, but a real estate bubble probably isn’t on my top 10 list. things to fear.