Paul Krugman got it right. But it should not have taken a Nobel Laureate to note that the emperor’s nakedness with respect to the connection between the housing bubble and more restrictive land use regulation.
A just published piece by the Federal Reserve Bank of Boston, however, shows that much of the economics fraternity still does not "get it." InReasonable People Did Disagree: Optimism and Pessimism About the U.S. Housing Market Before the Crash, Kristopher S. Gerardi, Christopher L. Foote and Paul S. Willen conclude that it was reasonable for economists to have missed the bubble.
Misconstruing Las Vegas and Phoenix: They fault Krugman for making the bubble/land regulation connection by noting that the "places in the United States where the housing market most resembled a bubble were Phoenix and Las Vegas," noting that both urban areas have "an abundance of surrounding land on which to accommodate new construction" (Note 1).
An abundance of land is of little use when it cannot be built upon.
Building is largely impossible on the "abundance of land" surrounding Las Vegas and Phoenix. Las Vegas and Phoenix have virtual urban growth boundaries, formed by encircling federal and state lands.
In both cases, prices per acre rose at approximately the same annual rate as in Beijing, which some consider to have the world’s largest housing bubble. According to Joseph Gyourko of Wharton, along with Jing Wu and Yongheng Deng Beijing prices rose 800 percent from 2003 to 2008