In all honesty I do not believe that professional economists fully understand the economy.

The old joke is that if you put three economists in a room, you'll get four theories.

From town politics I get the impression that contractors would like to build more low and middle end housing because they move quickly. However, the town wants mostly high end housing because it raises property values and tax revenue. At least that's how it works around here. Also, if you get city council people in a private conversation you can uncover racial reasons for limiting lower end housing.

I think you are right on both issues. A lot of zoning and other regulation limits the building of apartments and reasonably sized housing. And not doubt racism plays a large role. Similarly our tax code helps: it would make sense to replace the mortgage deduction with a tax credit that is neutral between rental and owner occupied housing. Going further back, the old VA loans biased the process towards new homes, because for a long time those loans would pay for buying or building a home, but not rehabbing one. (That changed, but way too late.) Other things was the whole process of "redevelopment". Another was the fact that a lot of homes knocked down for freeways, highways, roads and so on were never replaced. Another is that pre-Reagan we had 65 billion a year (in Reagan era dollars) that went into building low income housing. That was reduced, then eliminated, and never restored. So we have really screwed up housing in the U.S. in a lot ways.

And flea nails it:

In all honesty I do not believe that professional economists fully understand the economy.

Oh and Tommyrot, I think the short answer to your confusion is that homes are overvalued, but given that people borrowed a lot on this, a drop in values will hurt the economy. The fact that a drop is harmful AND probably inevitable is one of the reasons housing being overvalued is a problem.

All the talk of the housing bubble bursting has me kind of terrified, actually, since I'm buying a co-op RIGHT NOW.

I think the "burst" will be a lot less in places like NYC and SF, since there is high demand for limited space.

The 2006 Year-End Google Zeitgeist is out.

Damn, I don't even know what the number one search word ('bebo') is... I am so un-zeitgeisty.

One of the unfun side effects of the bubble is it's effect on driving rents up too. It's not just houses that become unaffordable but apartments too.

I think the "burst" will be a lot less in places like NYC and SF, since there is high demand for limited space.

True, that. But it's still more than a little nerve-wracking to be setting a closing date when every article about housing is screaming "And whatever you do, DON'T BUY A HOUSE THIS YEAR!"

One of the unfun side effects of the bubble is it's effect on driving rents up too. It's not just houses that become unaffordable but apartments too.

Very much this. The prices for apartments out here is scare-eee. When Joe and I move, our rent is going to go up by at least $400. Yikes!

In all honesty I do not believe that professional economists fully understand the economy.

I don't know why economists are specially underinformed compared to any other professional academic. Psychologists don't fully understand why people behave the way they do. Mathematicians notoriously deal with thorny unsolved problems. Obviously there's a huge debate going on in physics right now as to what kind of evidence we need to base theories on. The mystery IS the point.

After expressing this opinion in my first micro-econ class in grad school, the professor (who is one of your colleagues, I think, flea, so I won't mention his name) went out of his way to heap scorn and derision on me.

I have to say, it sounds like he was responding in kind, unless there was some compelling reason to heap scorn and derision upon the man's chosen profession. In his class.

I was told that the bubble would burst less hard in places with good employment. And that LA was one of those places. However, our bubble is stretched so artificially thin--it can't sustain itself.

As a non-owner who wonders where I'm supposed to get over half a million to buy a tiny home in my neighbourhood, I'm reasonably unsympathetic to the disappearance of paper wealth. But, damn, it must have been seductive to get in on the ground floor, and I'm sure people were busier checking what floor they were on that noting how many floors were left to go.

whenever I open a magazine I can usually point to exactly where photos have been retouched

From what I've been lead to believe, either your hand is tired from pointing or you don't read many magazines. You know those riders that bands have for their venues? I remember a TT poster who worked for, I think, Teen People. The celebs come with their own riders. So if it's not a candid (and maybe even then), J-Lo has had exactly the same sort of work done on her photos every single time.

It's like my boob-job curiosity. If Salma's breasts aren't real, why doesn't everyone go to her surgeon? Even if Salma's breasts are real, maybe there still are many people wandering around with great fake breasts. And what I think of as the fake boob look is just the obvious boob job look.

They may be among us.