I happen to agree with the mainstream view that a US recovery seems to be underway. But this from the Persecuted Prognosticator drew my eye:
On housing: as everyone now knows (but oh, the abuse heaped on anyone pointing it out while it was happening!), we had a monstrous housing bubble between 2000 and 2006. Home prices soared, and there was clearly a lot of overbuilding. When the bubble burst, construction — which had been the economy’s main driver during the alleged “Bush boom” — plunged.
First, let's pause a moment and imagine the plight of a persecuted Times pundit who spent the Bush years, well, bashing Bush. It must have gotten lonely.
And let's replay (yet again!) his Nostradamus-like insight into the housing bubble, offered in May of 2006:
Ben Bernanke, the chairman of the Federal Reserve, contends that what's happening in the housing market is "a very orderly and moderate kind of cooling." Maybe he's right. But if he isn't, the stock market drop of the last two days will be remembered as the start of a serious economic slowdown.
Maybe the bubble will end with "a serious slowdown", or maybe not. Golly, I bet he did get abused for that. Of course, I don't see his predictions of a trillion dollar Federal bail-out of Fannie, Freddie and the US financial system, but maybe that is par for a "serious slowdown."
And while we're here, let's pick up on his admission that "Home prices soared, and there was clearly a lot of overbuilding". This seems to represent backtracking from what Krugman described as "one of the best pure-economic pieces I’ve done in my tenure at the Times". As Krugman explained in the referenced 2005 piece, in areas where lots of building is possible, home prices don't tend to rise - instead, new construction meets the new demand. Fair enough, but... Krugman then went off the rails, for example in this 2010 column, by arguing thusly:
To appreciate Georgia’s specialness, you need to realize that the housing bubble was a geographically uneven affair. Basically, prices rose sharply only where zoning restrictions and other factors limited the construction of new houses. In the rest of the country — what I once dubbed Flatland — permissive zoning and abundant land make it easy to increase the housing supply, a situation that prevented big price increases and therefore prevented a serious bubble.
Most of the post-bubble hangover is concentrated in states where home prices soared, then fell back to earth, leaving many homeowners with negative equity — houses worth less than their mortgages. It’s no accident that Florida, Nevada and Arizona lead the nation in both negative equity and mortgage delinquencies; prices more than doubled in Miami, Las Vegas and Phoenix, and have subsequently suffered some of the biggest declines.
As I pointed out at the time, Krugman's notion that price collapses couldn't follow an era of high construction failed to recognize that decreases in housing supply are not nearly as easily managed as increases. Typically, developers cut prices rather than bulldoze new construction (or any other existing housing stock), so the supply curve is quite inelastic on the way down.
Now, one might have thought that Las Vegas, cited above, was an example of a city that saw a lot of new construction yet experienced price collapses. Not so fast! In a 2006 post, Krugman explained that land use restraints limited construction there. Hmm - the numbers I dredged up (p. 9) showed that total housing units in Las Vegas rose from 559,799 to 819,600 from 2008 to 2009, an increase of 46%; by way of comparson, the housing stock in New York and Los Angeles rose by 4.7 and 3.1% over a similar period. And this report tells us about the Atlanta region:
The vast majority of housing available in the Atlanta region has been constructed over the past 40 years. In fact more than 20 percent of the housing stock in the Atlanta region was built between 2000 and 2007.
So Las Vegas had notably more new construction than Atlanta (on a percentage basis), yet to preserve his "best" effort Krugman wants to imagine that his model correctly places Las Vegas with LA and New York as tightly zoned areas distinct from places like Atlanta, where construction is easy. This is reality-based?
Well, we do have his current admission that overbuilding can be a problem, so we see him toddling towards the truth.
WHAT WERE ONCE VICES ARE NOW VIRTUES: I love to death Krugman's explanation of how the Obama recovery might take hold:
And after a protracted slump in housing starts, America now looks seriously underprovided with houses, at least by historical standards.
So why aren’t people going out and buying? Because the depressed state of the economy leaves many people who would normally be buying homes either unable to afford them or too worried about job prospects to take the risk.
But the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising.
Now, this notion that the US economy could ride the housing market to recovery until other horses took over was the strategy employed in the 2002-2006 bubble era, and in fact, was the strategy advocated by Paul Krugman in 2001. But since we are now, by some uncited standard, "seriously underprovided" with housing, well, away we go again. And this time, unlike the 80's or the 00's, a real estate boom won't be followed by a real estate crash. No, I don't know why not either - perhaps because geniuses like Krugman will warn us in time that things may end badly, unless they don't.