Bubble Contagion

Reading Kevin Drum and Alyssa Katz on why Texas didn’t see a housing bubble, it occurred to me that they might be asking the wrong question. Here’s Phoenix vs Dallas:


It seems to me that the real issue here is not about Dallas, but about Phoenix. Most of the places where we saw huge run-ups in price—Los Angeles, Miami, New York, whatever—are places where a combination of geography and regulation significantly constrained supply. There’s only so much coastline in Southern California or South Florida, permitting in New York City is complicated, and the suburbs of New York generally won’t allow themselves to become denser. In Dallas or Denver where there’s no key focal point, you respond to increased demand by increasing supply. But two key bubble cities—Phoenix and Las Vegas—have generally Dallas-esque characteristics.

So what went wrong? Ryan Avent hazards an explanation:

As it turns out, you can “catch” a bubble from elsewhere. Migration to Las Vegas and Phoenix came overwhelmingly from Southern California. Residents of Los Angeles would cash out their homes and move east, buying one or two properties in cheaper markets, investing in those properties, and generally transmitting the bubble mentality that characterised the real estate markets of the California coast. Analysis of price movements has identified ripple effects from the Los Angeles property market to the Las Vegas property market, and thence on to the Phoenix property market. It seems likely that a similar phenomenon took place in Florida, which absorbed a great deal of migration from bubbly northeastern markets.

These “caught” bubbles were incredibly damaging, because they combined rapidly rising prices with rapidly rising inventory, leading to massive housing overhangs and price declines up to and greater than 50% from peak. But other Sunbelt metropolitan areas managed to avoid them, perhaps because they absorbed more workers from declining markets elsewhere in the south or northeast or midwest. Housing supply growth then prevented any big initial increase in prices which might have led to the enthusiastic growth in credit that triggered bubbles elsewhere.

A strange world.