Krugman’s 10 years on the recession

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at:

Krugman’s first essay about the end of the housing bubble came out just about 10 years ago.

Nobody would pay San Diego prices without believing that prices will continue to rise. Rents rose much more slowly than prices: the Bureau of Labor Statistics index of “owners’ equivalent rent” rose only 27 percent from late 1999 to late 2004. Business Week reports that by 2004 the cost of renting a house in San Diego was only 40 percent of the cost of owning a similar house — even taking into account low interest rates on mortgages. So it makes sense to buy in San Diego only if you believe that prices will keep rising rapidly, generating big capital gains. That’s pretty much the definition of a bubble.
Bubbles end when people stop believing that big capital gains are a sure thing. That’s what happened in San Diego at the end of its last housing bubble: after a rapid rise, house prices peaked in 1990. Soon there was a glut of houses on the market, and prices began falling. By 1996, they had declined about 25 percent after adjusting for inflation.

And that’s what’s happening in San Diego right now, after a rise in house prices that dwarfs the boom of the 1980′s. The number of single-family houses and condos on the market has doubled over the past year. “Homes that a year or two ago sold virtually overnight — in many cases triggering bidding wars — are on the market for weeks,” reports The Los Angeles Times. The same thing is happening in other formerly hot markets.

Meanwhile, the U.S. economy has become deeply dependent on the housing bubble. The economic recovery since 2001 has been disappointing in many ways, but it wouldn’t have happened at all without soaring spending on residential construction, plus a surge in consumer spending largely based on mortgage refinancing. Did I mention that the personal savings rate has fallen to zero?

Now we’re starting to hear a hissing sound, as the air begins to leak out of the bubble. And everyone — not just those who own Zoned Zone real estate — should be worried.