August 08, 2005

"This is the way the bubble ends: not with a pop, but with a hiss." So says Paul Krugman, in this morning's very illuminating column on the onset of the bursting of the Housing Bubble. He mentions something that I've frequently referred to on this site, the fact that there are two separate "countries" within the United States, what he calls "Flatland" (where home prices have flatlined, due to the availability of open spaces to build new housing) in the middle of the U.S., and "Zoned Zone" along the coasts, where prices have skyrocketed. The Bubble will burst not by a dramatic fall in housing prices, according to Prof. Krugman, but in a long, sustained slump, where homes stay on the market longer and existing inventories remain unsold, creating a buyer's market (Angry Bear has a useful graph as to what past housing recessions have looked like, here).

Of course, as you might recall, I referred to the same phenomenum as "Red" and "Blue" America: the areas that have seen the most explosive growth in the past twenty-five years, almost without exception, voted for Kerry in the last election, while the states with the slowest growth went for Bush, again almost without exception. The YBK problem will disproportionately effect those areas of the country that favored Kerry, since it will be those homeowners who have been using their home's equity to stave off financial disaster that will feel the immediate impact of the Bubble.

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