August 08, 2005
The local housing bubble

Paul Krugman writes about the national housing bubble.

Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

In the nation as a whole, housing prices rose about 50 percent between the first quarter of 2000 and the first quarter of 2005. But that average blends results from Flatland metropolitan areas like Houston and Atlanta, where prices rose 26 and 29 percent respectively, with results from Zoned Zone areas like New York, Miami and San Diego, where prices rose 77, 96 and 118 percent.

Houston may be in "Flatland", and goodness knows we're busy sprawling out to new frontiers in exurbia, but that doesn't mean we can't be in danger of a collapse in the local housing market. The Chron's Nancy Sarnoff wrote about that just yesterday.

Houston home builders put up more new homes in the second quarter of this year than in any other quarter in history.

The number of single-family housing starts which reached 14,335 in the second quarter was also higher than the total number of homes built in all of 1995, according to real estate consulting firm Metrostudy.

But this raises a question: Are we headed for an oversupply?

The total inventory of new housing is up from last year to a 7.1-month supply, meaning that's how long it would take to sell those homes.

Metrostudy President Mike Inselmann said a six- to seven-month supply is a healthy level.

Plus, most of the homes counted in the second-quarter study are under construction.

Inselmann said it would take only 2.2 months to sell the supply of finished homes.

There's more concern in the used-home market, he said.

"The resale market is characterized by sort of a gradual creep of inventory over the last three years," Inselmann said.

While insisting "it's a good time to be a home buyer," Inselmann wouldn't say it's a buyer's market.

"It's balanced," he said.

But if interest rates go up, first-time buyers could get priced out of the market, and inventory could really increase.

Of all the new homes that sold in the past year, nearly 59 percent were under $175,000, according to Metrostudy.

The question I have here is where is the demand curve? We know how many new houses are being built. How many new households were there in that quarter? What's the rate of growth for new households in the greater Houston area? In other words, do we have enough prospective buyers for all these new houses, and will we continue to have enough prospective buyers? If we wake up one morning and realize we've got a lot more houses than we do househunters, then you better believe prices will take a dive.

Unfortunately, I'm not really sure where to find an answer to those questions. I've noted before some growth numbers for Houston and some of its suburbs, but that's an incomplete picture. I'm trying to make sense of the state demographer's website, but it's slow going. If I figure it out, I'll post an update.

Anyway. Calculated Risk has some supplemental data for Krugman's column, and notes that rising inventory in the housing market is not an unusual phenomenon these days. I got the Krugman link from Atrios.

UPDATE: As suggested by Tom and Ellen, I've sent email to Dr. Barton Smith and to the Houston-Galveston Area Council, as well as to Nancy Sarnoff. We'll see if I get any answers.

Posted by Charles Kuffner on August 08, 2005 to Elsewhere in Houston | TrackBack

Charles, nice. post. In regard to the prospects of local Houston housing bubbles, you might want to check out UH prof, Bart Smith. He is the leading local expert on the economics of local real estate. I've blogged about him quite a big, the latest of which is at

Posted by: Tom K on August 8, 2005 8:36 AM


I'm curious about Houston. Do you think it is just growth or is the Houston population shifting away from and abandoning certain neighborhoods at the same time?

Here in Waco certain inner city neighborhoods appear like they are being slowly abandoned as growth increases the housing stock in the suburbs. That sort of trend is most obvious in big cities like Detroit and St. Louis where block after block of abandoned houses can be found. Here in Waco its certainly not that bad, but you see some places where existing housing is either being converted over to commercial uses or just abandoned.

Posted by: Kent on August 8, 2005 9:40 AM

Kent - According to H-GAC, Houston is still experiencing good growth in its inner core, though the majority of its growth is in the outer radius. Click the link for their Executive Summary (big PDF file) for lots of details.

Posted by: Charles Kuffner on August 8, 2005 10:19 AM

I don't completely buy Krugman's point about "flatland." It seems like most towns of any size have their own little "hot" areas where prices are going through the roof (relatively speaking). And what about Hill Country prices.

Posted by: bill on August 8, 2005 10:55 AM

One factor that Krugman doesn't mention is schools. It's been my experience that people will pay a bigger margin for good schools than anything else. Even people without kids will pay extra to live in a good school district because they perceive that it helps their property values.

Of course, good schools also tend to correlate with wealth but I don't think it is just that wealthiest areas have the best schools. I think having good schools actually creates value in neighborhoods.

In Texas and other flatland areas it is true that there is plenty of space and development around cities like DFW can keep expanding virtually without limits. There are actually people in my China Spring subdivision (10 miles NW of Waco) that commute 80 miles to Fort Worth on a daily basis.

But that said, the areas open to development that have top schools are much fewer and far between. And I think they tend to create their own little bubbles. Or, if not bubbles, at least areas of higher value. Look at the housing prices in Southlake which is just NW of DFW Airport. Or the housing prices in Eanes School District in West Austin compared to the rest of the Austin metro area. And if you want to put your kids in the Highland Park school system in Dallas you're going to have to buy into that neighborhood because it isn't expanding and there aren't many if any new houses being built.

Here in Waco if you have kids you're more likely to move to the Midway or China Spring school districts. And of course that's where all the new development is occuring. Nice land much closer into the city goes undeveloped because it is in the wrong school district. Every day when I drive into Waco I can see where the school district lines are because that is the line of development in NW Waco. Once you leave the older built-up parts of Waco you pass through about 5 miles of farms with the occasional bit of light commercial development until you cross into the China Spring ISD at which point new houses and entire subdivions are going up like mushrooms. The student population in the China Spring ISD has been going up at about 10%/year for the past 5 years or so and I promise you the growth rate in the entire Waco area is nothing like that.

Posted by: Kent on August 8, 2005 11:16 AM

By the way, if you want a real eye-opener, take a look at this article in the LA Times from last week about the land-buying frenzy in West Texas. Seems that suckers from California and elsewhere are buying up scrub land in West Texas sight-unseen. Idiots,0,3532461.story

Posted by: Kent on August 8, 2005 11:20 AM

I recently posted a critique of the Zoned Land theory:

Posted by: Jeb on August 8, 2005 1:14 PM

Paul Krugman writes about the national housing bubble.

You're assuming the proposition.

Krugman asserts there IS a national housing bubble, while admitting there is disagreement.

Even if one accepts his contentions -- and reasonable people can disagree -- a valid conclusion may well be that there's a market correction in spots, not necessarily a bubble.

Given our population growth and any number of incentives driving record home ownership, it's easy to see the housing boom sustaining itself. Ideologues like Krugman may hope otherwise, but hope doesn't necessarily translate into reality.

Posted by: kevin whited on August 8, 2005 1:22 PM


And we'll assume you have no ideology...LOL

There is a housing bubble. Mainly in areas where expansion is limited. (Coastal areas) Krugmam was speaking in general terms. No way did he say you can't have a mini-boom in Kansas City or Dallas.

Posted by: padcrasher on April 30, 2006 12:46 PM