As someone who moved to Scottsdale, AZ in 2003 after living in MD for nearly 40 yrs (Rosedale, Catonsville, Columbia and Ellicott City) I can say that comment is idiotic.

It was pure speculation and flipping of houses that drove up prices, much was done by people living in CA. They could buy 3-4 homes for the price of one in CA (or from the proceeds of a home equity loan). Then flip them in a few months for a tidy profit.

The speculation out here was extreme. My house, in a nice area, went from $350,000 in 2003 to about $700,000 during the height of speculation in 2007 before falling back to the $350-400K range.

Houses were being sold in the middle of nowhere for $250K. It was crazy. Anyone who has spent time in AZ knows it isn't a high income job area. It does have a number of wealthy people here but most jobs are in tourism and those don't pay high salaries.

Jay,

Krugman is a living study of what happens when a person sincerely believes he is the smartest person in the world. He is infallible and if he ever says something foolish it is only because we simpletons fail to understand the wisdom of his words

Truth be told Krugman's analysis fails because he is incapable of coming to grips how economies actually work. In his view there are bankers and politicians and everyone else. But the ramifications of the housing bubble cannot be understood without considering everyone else.

A key reason the housing bubble has popped worse in "flatland" is because the housing bubble distorted incomes far more in "flatland" than elsewhere. In "flatland" the availability of land and the ease of securing building permits greatly expanded employment in the construction, retail & financial services industries. This boom distorted the perception of the economy. As long as housing did well people enjoyed rising incomes and ever increasing prosperity..

When the housing bubble popped in flatland everything fell apart. There was no underlying economy to fill the gap. The construction jobs went away. The loan servicing jobs went away. The retail jobs went away.

But in blue-state zoneland the government jobs never go away. So housing prices decline but they do not crash as they have in flatland.

Krugman may have once been smart enough to win a Nobel prize but today he is a partisan hack. He spends so much time in his echo chamber the sound of his own voice is all he needs to hear to convince himself he has won another argument.

Dear Jay.
You are right on about the housing mess in Phoenix and Las Vegas. We recently moved from Baltimore to Phoenix and bought a beautiful house that would have cost twice as much in Baltimore. What we thought was a great deal at the time soon turned sour as the whole Phoenix area underwent a major cost depreciation in the metro area. We figure our house is worth about 25% less now than what we paid for it. All within the space of one year. Because of the large supply of unsold homes in the area, it will take years for us to recoup the equity in our home.

Unlike Maryland, where developers normally build less than a hundred homes in a new subdivision, developers will build new homes in the thousands in the Phoenix area. There are hundreds of acres of land available for development and less restrictive zoning here as well, so developers have run amok out here building new homes as fast as they could.

We have all seen the ugly result of over-development in states like Arizona, Nevada, and parts of CA and FL.