Greenspan Wrong, Krugman Right on "Housing Bubble"

The Roots of the Mortgage Crisis
December 12, 2007; Page A19

Former Federal Reserve Board Governor Alan Greenspan is wrong and liberal New York Times columnist is right on the “housing bubble.”

Writing in today’s Wall Street Journal, Greenspan says that he had expected Fed actions to “dampen the then mounting house price surge.” Greenspan goes on to blame global economic factors for the continuing rise in house prices.

Greenspan makes the same mistake so many other analysts have made before. It starts with the whole concept of the housing price surge or the “housing bubble.” As Paul Krugman has pointed out, there is none. Where the demand pressures are the greatest, metropolitan areas like Atlanta and Dallas-Fort Worth house prices have maintained their historic link to household incomes. The Median Multiple (median house price divided by median household income) has remained at 3.0 or below.

Krugman notes that prices have risen in what he calls the “zoned-zone,” where there is strong land use regulation (such as smart growth). Where land use regulation is not overly restrictive, prices have not risen. Even with sub-prime lending practices, metropolitan areas with reasonable regulation have been able to handle the higher demand.

Greenspan’s analysis of the housing market has been every bit as off the mark as that of the Reserve Bank of New Zealand, which has raised interest rates multiple times to bring house price rises under control. It helps to address the cause. Interest rates and Greenspan’s global economic factors have little influence where local planning authorities have made land for development scarce.

Excessive land regulation (call it smart growth, urban consolidation or compact city policies) is the problem. Housing affordability has been destroyed in many metropolitan areas and the overall economic impacts of the over-heated housing market it has generated are just beginning to be felt. The central bankers need to look much closer to home to solve the problem.