Paul Krugman expands on the now-conventional wisdom that we are experiencing a housing bubble, warning that the economic recovery is perched on its fragile and slippery foundation. He then cautions:
"Beyond that, there's the disturbing point that we're paying for the housing boom (and the military buildup and tax cuts) with money borrowed from foreigners. Now, any economics textbook will tell you that it's fine to borrow from abroad if the money is used to expand the economy's productive capacity. When 19th-century America borrowed from Europe to build railroads, it was also enhancing its ability to repay its debts later. But we aren't borrowing to build productive capacity."
I'm trying to decide whether residential real estate is as pure a consumer good as Krugman's analysis suggests. The boom is largely driven by an influx of affluent buyers in city centers. Such buyers may be enhancing their productivity in one of two ways. Either 1) they avoid commuting two hours a day from the exburbs, or 2) they move from smaller cities to larger ones where their professional opportunities are greater. To the expent that either of these things are true, the real estate boom will make us more productive.
Further, the boom can be regarded as an effect, not a cause, of two more fundamental, productivity-enhancing social trends: the drop in urban crime rates and marginalization of racism. We've paid a steep price, economically speaking, for those two hour commutes all these years. Giving them up should pay dividends for the economy.
And chicken and egg-like, gentrification triggers further gentrification, pushing down the marginal cost of a hipteresque lifestyle and attracting later adopters. Yep, I think Krugman may have this one wrong. The only losers will be the truly hep, who'll find it increasingly difficult to locate a charmingly decrepit urban neighborhood.
Posted by Marie Gryphon on August 12, 2005