Over the past few days we’ve seen and heard multiple references to Paul Krugman’s NYT op-ed from 2005 in which he used the terms “the Zoned Zone” and the “Flatland”.  This article keeps popping up when folks are discussing the latest round of Case-Shiller data. 

In this piece Krugman presciently noted some trends that later blossomed into the current single family home crisis.  Here’s how he defined the two geographical areas in the piece –

In Flatland, which occupies the middle of the country, it’s easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don’t really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can’t even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence “zoned” - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

A simple look at permitting and construction in some of the “Zoned Zones” – like California – show that construction still exploded during the bubble frenzy, but there is a kernel of truth to Krugman’s commentary. 

The point – don’t be confused when you hear the terms used in discussion today.  The media and some pundits like terms such as these as it’s much easier to try and paint the analysis of housing issues with a very broad brush.  Krugman’s a big name, and the NYTs is the nation’s authority on every topic under the sun, right?  (We’ve been told that recently by several readers.)

Emerging / recovering market investors know that regardless of whether a market is in the “Flatland or the Zoned Zone” – in this day and age you simply must drill down carefully into the objective metrics measuring the market. 

Failure to do so will leave treasure on the table. 

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