Jonathan Lanser talks about why the Orange County real estate market is selling so many new houses right now. Yes, its that Orange County, home of the original sup-prime boom.

Reasons most relevant to my thesis

5. New housing supply is tight in Irvine as one would expect in a “closer in” location with great jobs. Essentially, no new homes were started in 3 years and what new home competition there is currently, consists mostly of product based on the design palette of the housing bubble.

4. Existing home inventory is tight. In March 2011, the resale inventory was 4.5 months in Irvine and overall vacancies were just 5.9% of its housing stock, well below the State’s 8.1% and the Nation’s 11.4%. Shadow supply is under control. Foreclosures and defaults are rising, but they are relatively low and the rise is likely to be temporary. The delinquency pipeline is dropping. For example, in September 2010, 30-day delinquencies for non-agency mortgages were down 30% in Irvine to 113 from 159 a year earlier

Typically homes sales have served as a “counterweight” to the rest of the economy. When times are good the Fed raises rates, lowering construction. When times are bad the Fed lowers rates, increasing construction.

The structured finance bubble – we must never forget about the role structured finance played in all of this – more or less inverted this process. Construction boomed even as the Fed raised rates. Construction collapsed even as the Fed lowered rates.

What this implies is that in the early collapse areas like the OC supply is already tight. It will be tightening in many places in the coming 18 months.

Just as the nature of 2007 – 2009 set up the possibility of a recession within a recession, there is now the theoretical possibility of a boom within a boom. To be more specific as unemployment falls, home building will pick up thus dragging unemployment down further.

Monetary policy in this new environment is incredibly challenging because there are risks to being behind the curve have increased dramatically. The Fed was disastrously behind the curve on the way down. We have to stay vigilant that it is not behind the curve on the way up.

What I suggest, however, is not premature tightening but an end to the Greenspan policy of slow steady tightening. If the fundamentals in the future suggest a sharper tightening the Fed should be more willing to accept this.

Juice the economy now, be prepared to take away the punch bowl all at once later.