Real Estate Prices and the Problem of Averaging

Paul Krugman in No Bubble Trouble? writes on housing prices and the recent study that said, on average, Americans still spend a lower percentage of income on housing than at times in the past:

"Last summer I suggested that when discussing housing, we should think of America as two countries, Flatland and the Zoned Zone.

In Flatland [most of the country], there's plenty of room to build houses, so house prices mainly reflect the cost of construction. As a result, Flatland is pretty much immune to housing bubbles. And in Flatland, houses have, if anything, become easier to afford since 2000 because of falling interest rates.

In the Zoned Zone [Northeast coast, West Coast, etc.] , by contrast, buildable lots are scarce, and house prices mainly reflect the price of these lots rather than the cost of construction. As a result, house prices in the Zoned Zone are much less tied down by economic fundamentals than prices in Flatland."

His point is that discussion of averages misleads. It's a reminder useful not only in discussing housing, but in other areas of national debate.