Wonking Out: Are We in Another Housing Bubble?

Do you remember the housing bubble? OK, if you’re 35 or younger, probably not — you were a teenager at the most when the bubble burst. But it was a huge deal at the time, and a very strange one.

When the bubble was inflating in the early 2000s, it seemed to me and others — Dean Baker may have been the first prominent economist to sound the alarm — to be the most obvious case of mispricing we’d ever seen. At least the dot-com bubble of the late 1990s had the excuse that businesses were developing exciting new technology, 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 those extraordinary prices?

At the time, however, anyone raising questions about housing was treated like … people who now raise questions about cryptocurrencies. (After yesterday’s column went online, a Wall Streeter friend texted “God help your inbox.”) I got a lot of “You only say there’s a bubble because you hate President Bush” emails.

Anyway, the bubble eventually burst, taking a large part of the financial system down with it. That is a worrying precedent, because housing prices have once again been rising rapidly. In fact, the average real price of housing in major markets is now higher than it was at its 2006 peak:

Here we go again?Credit…FRED

So is history about to repeat itself? Well, there are important differences between this house-price surge and the previous one, differences that arguably make this one less worrying.

One important feature of the 2000s spike in housing prices was that it affected only some 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 the housing supply — and the Zoned Zone, where “a combination of high population density and land-use restrictions” made it hard to build new houses. And the big price increases took place only in the latter. For example, here’s a comparison over time between Miami and Dallas:

But this time it’s more evenly spread.Credit…FRED

That distinction was key to my conclusion that we were in the midst of a bubble. By the mid-2000s, real home prices at a national level were up by “only” about 50 percent, a number you could, with painful intellectual contortions, try to justify on the basis of low interest rates. But there was no way to justify the 100 percent or more increases we were seeing in places like Miami and San Diego.

This time, however, is different. Look again at the Miami-Dallas comparison. As you can see, the new surge in home prices is much more of a national phenomenon, with prices rising as much or more in Flatland than in the Zoned Zones along the coasts. Adjusted for inflation, prices in places that were the epicenter of the 2000s bubble are still below their previous peak (and their price rise is easier to justify, because interest rates are even lower now); the reason the national average is so high is that prices are surging everywhere — even in small towns that used to be bargains.

How is this possible? In the 2000s home prices stayed low in many places, despite surging demand, because there was plenty of supply: Buildable land was abundant both in small cities and in cities that, like Houston, don’t have much in the way of zoning.

This time, however, record home prices haven’t led to a boom in housing construction:

Build we won’t.Credit…FRED

But why? With houses selling for so much, you’d think there would be a big incentive for developers to throw up new units, which they can do quite quickly. I still remember driving around New Jersey during the McMansion boom and being amazed at how quickly houses went up. Why aren’t the developers rushing in now?

In correspondence, my old M.I.T. classmate and economist Charles Steindel pointed me to the likely answer: It’s the supply chain, stupid. Look at what is happening to the price of building materials:

The supply chain strikes again.Credit…FRED

So prices are shooting up, even in places with plenty of buildable land, because supply can’t rise to meet the demand.

Put all this together, and the case for a bubble isn’t nearly as compelling as it was in 2005 or 2006. That doesn’t mean that all is well. Real estate people I know tell me that there’s still a feeling of unhealthy frenzy, and people who paid high prices for small-town houses may regret it once supply chains get unsnarled and more houses get built.

But this time is different, even if some house prices are starting to look like the 2000s bubble. I wouldn’t say that everything is fine, but a housing bubble probably isn’t in my top 10 list of things to worry about.

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