Benjamin Wallace-Wells has predicted the impending bursting of the housing bubble and has both Kevin Drum and Matthew Yglesias convinced. I’m a bit more skeptical. Indeed, Wells doesn’t provide much proof. The most convincing bit is:

One index of housing inflation is the difference between house prices and rents. In a healthy market, driven by demand, rents and sale prices ought to track roughly together. But while sale prices have soared, rents have stayed flat; and in some of the most overheated markets, like San Francisco and Seattle, they have actually been declining. Such a gap, the economist and New York Times columnist Paul Krugman has written, suggests “that people are now buying houses for speculation rather than merely for shelter,” evidence that he called a “compelling case” for a housing bubble. “Within the next year or so,” The Economist argued in a May 2003 editorial, these regional “bubbles are likely to burst, leading to falls in average real home prices of 15-20 percent” across America. And, of course, in the most heated markets the drop is likely to be steeper yet.

While certainly not unprecedented, the rationale for such a collapse isn’t clear. The economy is finally heating up, even on the jobs front. Housing is an item for which demand is rather inelastic–pretty much everyone wants a place to live, after all, and buying is much more advantageous than renting for anyone who’s not a transient. The only thing likely to cause the housing market to cool off is the fact that mortgage interest rates are remarkably low right now and, presumably, are more likely to go up than come down. Still, absent significant inflation–which we haven’t had in two decades now–there’s no reason that rates should go up all that much.

Housing bubbles tend to be local. For example, prices in the greater Washington, D.C. area are sure to go up for many years to come. People are moving further and further into the suburbs–many commuting more than 90 minutes to work–in order to find affordable housing. The area where I live is growing at a phenomenal rate. There’s a long waiting list for new homes and pre-existing houses are still selling within a day or two of going up for sale. Indeed, Wells seems to be predicting something rather localized:

Only in about 20 metro areas, mostly located in eight states, does the relationship of home price to income defy logic. The bad news is that those areas contain roughly half the housing wealth of the country. In California, the price of a home stands at 8.3 times the annual family income of its occupants; in Massachusetts, the ratio is 5.9:1; in Hawaii, a stunning, 10.1:1. To some extent, there are sound and basic economic reasons for this anomaly: supply and demand. Salaries in these areas have been going up faster than in the nation as a whole. The other is supply: These metro areas are “built out,” with zoning ordinances that limit the ability of developers to add new homes. But at some point, incomes simply can’t sustain the prices. That point has now been reached. In California, a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home. In the late 80s, the last time these eight states saw price-to-income ratios this high, the real estate market collapsed.

Now, granted, those ratios are inordinately high. But someone is buying those houses now. Indeed, the “bubble” continued during the longest economic slump in the last quarter century. With the economy on the upswing, it seems odd that the bottom would fall out of the market now.

The side argument in Well’s piece is what a crazy loon Alan Greenspan is to suggest that people get into Adjustable Rate Mortgages (ARMs). Whether an ARM is a good idea depends, not just on the likely direction rates will take in the future, but expected lifestyle choices. Most ARMs aren’t adjustable right away. I bought my townhouse with an ARM (actually, two of them) last October because I was able to get a rate nearly 2 points lower that way. But the rate is fixed for the first five years. It’s a reasonable assumption that I’ll either move or refinance before then. Since most of what one pays during the first few years of any mortgage goes towards interest, it makes sense to get the lowest monthly payment possible when buying a home that one is going to sell within a short period. “Locking in” a fixed rate is smart only if 1) rates are low and 2) you’re planning to stay in the house longer than the fixed period of available ARMs.