Friday, April 29, 2005

Housing bubble

Mike Davis offers an ominous article (does he write any other kind?) on the Great American housing bubble. As a San Francisco homeowner, this is a topic of considerable personal interest and anxiety. Based on quick tours of local open houses from the last few weekends, however, I sure don't see much evidence to support Davis's claim that "the bubble has already burst in San Francisco."

Although I don't doubt that we are in the middle (or perhaps at the end) of a housing bubble, it's not clear to me that the housing bubble will necessarily unwind with a massive bust. It's certainly possible that it will unwind not through a crash in nominal prices, but rather via a sustained period of nominal-price stagnation, perhaps twinned with a new permissiveness toward inflation. These quibbles aside, Davis's diagnosis of the relationship between the twin deficits (trade and budget) and the housing and asset bubbles is clearly correct.

The point of this post, however, is not to discuss the economics of the housing bubble, but rather to make an observation about the political geography of the housing bubble--something I haven't seen discussed much elsewhere. Start with an interesting observation: if you go down the list of cities usually mentioned as sitting on the outer edge of the housing bubble (places like Washington DC, San Francisco, Los Angeles, Seattle, New York, Boston, Las Vegas, Miami, etc.), it's striking to note that these cities are all Democratic strongholds. By contrast, if you go down the list of strongly Red cities (e.g. Dallas, Houston, Oklahoma City, Memphis, Charlotte, etc.) there's been very little housing inflation.

Curious, no?

One of the few articles I've seen that tries to interrogate this odd conjuncture appeared a couple months back in the American Conservative. In this article, Steve Sailer noted that, "Bush won the 26 states with the least inflation in housing prices between 1980 and 2004" and that instead of looking the Red-Blue split as a rural-urban split, "there's a far better fit between Bush's share of the vote and lack of real estate inflation." Sailer concludes that, "While the arrow of causality no doubt points in multiple directions, it's plausible that the price of a house with a yard can sometimes make the difference between whether or not young adults start down the road to marriage, children, and voting Republican."

Then Sailer's argument takes a different turn. Although he argues that "the Law of Supply and Demand" (note the obeseiant capitalization) explains the divergence of housing market bubbliness, his analysis focuses almost exclusively on the supply variable. Like most Red-versus-Blue state analysts, he places a comparison of Texas and California at the center of his argument, with Houston and San Francisco taken as the emblematic cities. Cities like San Francisco, he argues, simply have nowhere to expand. (What places there are to expand into are less naturally attractive than the urban center. As I say, "flyover country begins at the Altamont Pass.") By contrast, Sailer argues, "in comparison to California, the immense eastern half of Texas is all about equally mediocre. Unlike the western half of Texas, it has enough water and the climate is survivable with air conditioning, but that's about all you can say for it (other than there is some pleasant hill country around Austin, which, not surprisingly, is the scenic blue dot in the middle of the broad red plains of Texas.)"

No doubt there's something to Sailer's argument. Places like San Francisco and Manhattan have nowhere to expand but up, and that's a more expensive proposition than expanding out into as-yet-minimally-developed ranchland. But what's curious about Sailer's argument is that even though he bows furiously at the supply side of the equation, he almost doesn't mention the demand side at all. In fact, a major reason why places like New York and San Francisco have been bid up furiously, whereas places like Houston have not, is that places like New York and San Francisco are exceedingly nice, whereas places like Houston really are not. And in fact, given the politics of the people who live in places like Houston, these places are continuously getting worse (e.g., more and more polluted, fewer and fewer social services), which has helped to keep demand in check. By contrast, the politics of places like New York and San Francisco (encouraging tolerance, diversity, etc.) ensure that these cities are continuously getting nicer, thus driving demand (and prices) ever higher.

At least, that's one interpretation.

Let me make another (somewhat contradictory) observation, which relates to John Jay Chapman's bon mot that "politics is organized hatred." Could it be that the reason that the Bush regime has allowed housing prices to be driven sky-high in the Blue cities is that they don't care about the eventual pain that the crash will cause in those places? The way they look at it, there's been some moderate housing inflation in their favorite towns, which is all to the good, and if those liberals have allowed themselves to get worked up into a frenzy, well, they'll get what's God's got coming to them.

Actually, I don't believe this, because I think the idiots running Bush's economic policy really believe that there's no such thing as a bubble. It's all politics to them. The way they actually look at it, I suspect, is that they've got the liberals on the run into a few enclaves on the Coast, and if the liberals want to bid up the prices there to get away from the Great Red Masses, well, screw 'em.

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