The Crash That Wasn't, Part V

The argument on this blog, since before the real-estate bubble popped, has been that a collapse of home prices is unlike the collapse in technology stock prices in the early 2000s, or the bubble now being forecast in environmental technology. The difference is pretty simple: a lot of tech-bubble money was invested in startups that promised to deliver unneeded services, or ones already provided efficiently by the offline market. And if a green bubble is indeed brewing, it's because there is more money being aimed at developing carbon-reducing technology than there are legitimate products to fund. Historically, that leads to unrealistic investments, and a crash.

Alex Tabbarok, a economist at George Mason University, makes the obvious point in today's New York Times that housing is neither unneeded nor overfunded. "Much of the increase in prices was a rational response to changes in fundamental factors like interest rates and supply," writes Tabbarok, noting that "land is hard to come by in places like Manhattan and San Francisco," and other coastal areas where people seem to prefer to live. Even in inland areas, Tabbarok adds, "zoning and other land-use regulations have made [housing] scarce." As a result, he predicts that home prices will settle at about 2004 levels. While there was speculation and while we feel bad for anyone who was forced to buy at the peak of the market, for most 2004 is not a bad number. We seem to remember that prices for houses then made them an insanely good investment.