American Dream

According to economist Paul Krugman, slightly less than 30 percent of Americans live in what he calls "the Zoned Zone," where land-use regulation has made housing unaffordable. Because housing costs in this area are so different from the rest of the U.S., "data on the median house nationwide are irrelevant."

Krugman's latest column in the New York Times (which, unfortunately, you must now pay the Times to read) is responding to the housing affordability study I mention below. That study claimed that housing is actually more affordable today than it was thirty years ago. But, as Krugman notes, housing reached a "peak" of unaffordability at that time.

Moreover, Krugman says, housing was unaffordable in the early 1980s solely because of high interest rates. As soon as interest rates fell, the problem was corrected. That's not the case today; housing in the Zoned Zone is unaffordable in spite of extremely low interest rates. "Restoring affordability will require a big fall in housing prices," comments Krugman.

In the 1980s, the only regions of the country to have unaffordable housing were coastal California and the Northeast, mainly Massachusetts. Between 1989 and 1994, housing prices in these areas fell by 15 to 25 percent. Today, we can expect a much greater decline in housing prices in far more areas of the country, including much of Florida, the East Coast from Massachusetts to Northern Virginia, and almost the entire West Coast, plus to a smaller degree Denver and the Twin Cities.