Harvard Economist Ed Glaeser's done some interesting work on housing bubbles, which is in part interesting because his original model turned out to be spectacularly wrong. Originally, Glaeser predicted that cities, like say Las Vegas or Phoenix, that had room to grow and pliant zoning could not have bubbles because the extra supply would keep prices in check.
But, of course, there was no shortage of IPO's in 1998 and that hardly prevented the tech bubble. All one needs for a bubble is a bunch of cash floating around and reflexive feedback loop of asset price appreciation.
To his credit Glaeser has since revised his theories, to some extent. And that's good, because there's a strong case that it shouldn't be too easy to build new housing. Houses will be around for a long time, assuming they're built solidly, demanding public services to support the inhabitants and requiring infrastructure to support them.
It would be foolish for any local gov't to ignore the social costs of runaway inventory, (as Glaeser recognized after his zoning theory was disproved by events). The most intractable assets and liabilities of any town, outside of its God given location, is its building stock. Further, the economic strength of any locality is strongly path dependent. (It is much more difficult to get businesses or mobile professionals to move to a depressed tax starved city, than a healthy rival). And letting a host of developers throw up a bunch of unwanted instantly vacant tract homes is a good way to become depressed and cash starved fast. Maricopa AZ, for example, seems unlikely to recover anytime soon.
