Another Sign of a Housing Bubble?

Housing optimists like to talk about

Housing optimists like to talk about "unmet needs." As in: The housing boom will never end because there's a huge "unmet need" for more and bigger houses. You can find this viewpoint well expressed in the New York Times Magazine's cover story yesterday on Toll Brothers, the luxury home builder.

On one level, the unmet-need argument is indisputable. We'd all like bigger and better houses, wouldn't we?

On the other hand, housing is just one need among many that are competing for funds. Just for example, there are my own unmet needs for a 200-foot yacht, not to mention replacement liner bags for our 12-year-old vacuum cleaner.

In the last few years, housing has been elbowing aside other priorities. America has been satisfying the need for housing by diverting more and more scarce resources toward it. You can see that phenomenon in the chart below, which shows residential investment--i.e., the construction and remodeling of housing--as a share of GDP.

Has housing reached a permanently high plateau at around 6% of GDP? Or will its share of the economy soon fall back toward historic norms? Nobody knows for sure. But here's a parting thought: Imports have been soaring as a share of GDP--up 5 percentage points since 1990. To put it differently, we're living large in bigger and better houses by borrowing from abroad. I'm not sure how sustainable that is.

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