Arnold Kling  

Housing Bubble: Who Knew?

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According to the Wall Street Journal real-time economics blog,

A Factiva search of the top 50 newspapers in the U.S. returns 268 stories referring to a housing or real-estate bubble in 2003. In 2004 that number increases to 369 and in 2005 it swells to 1,608. Going month by month in 2005, there's a steady increase in "bubble" stories in the first part of the year, coming to a peak in June.

This isn't to say that reporters somehow "got" the bubble when nobody else did. Reporters' main job is to report, and if they're writing more stories about a housing bubble, it's probably because more people are saying that there is one. Indeed, 81% of respondents in an online poll in May 2005 said they thought the U.S. housing market was in a bubble. Most of the people who responded "yes" thought the bubble would keep growing.

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blabla writes:

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DWAnderson writes:

So was there a bubble in 2003? Hard to say isn't it-- because housing prices haven't declined to below 2003 levels. Only with the benefit of hindsight can we know there was a bubble instead of a fundamental changes that caused people to place a greater value on housing.

People talking about a bubble is not the same thing as "knowing" there is a buuble (as implied by the title of your post). Just as with the stories about pre-9/11 warnings of a terrorist attack, there are always those issuing warnings of one sort or another. The hard part is knowing when such warnings should be heeded and when they should be ignored.

spencer writes:

One of my favorite stories of economic history is that Sir Isaac Newton was involved in the South Sea bubble.

Newton was arguably one of the smartest men who ever lived-- he discovered the laws of gravity and invented calcus among his other achievements.

Supposedly he got in on the ground floor of the South Sea bubble and made a fortune. Moreover, he recognized it was a bubble and cashed out early so he preserved his fortune. But the story goes that the bubble kept going and he could not resist the temptation and jumped back into the market just in time to be wiped out.

So if one of the smartest man ever, could not recognize one of the greatest bubble on record, why would us mere mortals be expected to do better.

Maniel writes:

This year, 2008, has been an interesting time to consider what it means to own a home. The US government has long favored homeowners while at the same time promoting debt (mortgage interest deductions, equity-lines-of-credit interest deductions, virtual elimination of capital gains taxes, etc) which has elevated the status of homeownership and, ironically, made homes too costly for many. As the government encouraged the rise in prices (now called a "bubble") – a condition which is currently unwinding – homes came to be viewed more as investments than as sanctuaries. This led to the acquisition of debt beyond the ability of the borrower to pay, a situation where the home owns you rather than the reverse.

I believe that we are starting to see that when the government promotes one sector - like home building and ownership - and then tries to save all sectors from the resulting damage, we all pay a high price.

Gary Rogers writes:

Predicting the bubble is one thing. Predicting the domino effect of its collapse is another. We have had many bubbles before and will see many more in the future. The problem this time was that consumers were not solvent enough to withstand a collapse, the financial institutions were not solvent enough to survive the consequences and our treasury is not solvent enough to survive a bailout. The third layer of insolvency has not shown itself yet, but it is coming.

Ajay writes:

spencer, Newton also believed in alchemy and other occult nonsense. You can find tons of examples of smart people who fail miserably when they attempt something out of their narrow area of expertise. It is the rule rather than the exception. What is your point, that nobody can see a bubble forming? Many people could see that there was no reason for home prices to double in such a short period and that the rise was driven by the steady stream of cheap credit that allowed people to bid prices up so high, with the possible exception of the writer of this blog post, Arnold. Arnold did spot the tech bubble, however, as did many others, because it made no sense that those insane valuations would ever come true. It is always the excuse of idiots who invest in these bubbles that "nobody saw it coming," when the evidence always contradicts that lie in a painfully obvious way. Anyway, I don't see where you're leading; if nobody can spot a bubble, therefore what?

James writes:

Here's the relevant Google search volume data for the housing bubble.

Oil Shock writes:
Who knew?

I knew. I started developing an interest in economics specifically due to the budding bubble in housing in Silicon Valley, all the way back in 2004. The Bay area economy was still reeling from the aftermath of the tech bust. My search lead me to austrian theory of business cycle.

Greg Ransom writes:

Calculated Risk told me he was continually attacked for suggesting there was a housing bubble, when he first began his blog in 2005. He says he started the blog in large part because of the bubble.

The Housing Bubble blog began publishing in Dec. of 2004.

If I remember right, got started in the same year.

I began blogging the housing bubble sometime after I started PrestoPundit in 2003. As a good Hayekian, the artificial boom / housing bubble was fairly easy to see.

Lintel writes:

In May 2006 the CME launched housing futures and options contracts that use the S&P/Case-Shiller Index. Since the second week of the launch, the futures consistently pointed lower for one year out (the maximum duration at the time). There was a trading venue that unsentimentally traded down the forecast of housing prices.

Glen writes:

I first suspected it back when a friend told me about the FMs. Those suspicions were raised, but not to the point of taking action, when I checked the increase in the housing market and couldn't reconcile it with just population growth and available land (many land speculators loved telling me "they don't build more land"). I didn't really start worrying until I started seeing move in costs that were less than most rents. Problem is that it still was a question of WHEN the bubble would burst. Almost everybody I know that got out of the real estate market at the right time did so more by luck than any real knowledge.

Barkley Rosserr writes:

In the second edition of his Irrational Exuberance book, Robert Shiller argues that the housing bubble began in 1998. Of course at that time it was way overshadowed by the then vigorously ongoing high tech stock market bubble, and it was only the end of that bubble that really provided the juice for the housing bubble.

Historically, although there have been scattered local housing bubbles, such as in Boston and LA in the late 1980s, housing has generally been a commodity not all that subject to speculative bubbles, although vacant land and commercial real estate have been. Usually people are more level-headed about their own homes. The only period of housing prices rising as fast as they did in 1998-2005 in the US was 1945-50, when it was clearly a matter of fundamentals, surging demand against a housing supply unchanged essentially since 1930. There was nothing like this going on after 1998, and the price to rent and price to income ratios were already at all time historic highs by 2003. It was just plain obvious that it was a bubble to anybody who looked at all closely.

Greg Ransom writes:

You can track the late 1980's housing bubble in Southern California here:

Note well that the end of the bubble tracked with the slight downturn that cost George Bush the First his Presidency.

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