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Home Publications Blogs Beat the Press The Housing Bubble Should Not Have Been Hard to See

The Housing Bubble Should Not Have Been Hard to See

Saturday, 09 February 2013 20:34

Economists and other policy types are working hard to maintain the absurdity that the housing bubble was hard to see. Hence we have Federal Reserve Board Governor Jeremy Stein pontificating on how the Fed should deal with bubbles and the Post playing along with the gag.

Let's just run through the basic facts. Nationwide house prices had sharply departed from a 100 year long trend in which they had just kept pace with the overall rate of inflation. At the peak of the bubble in 2006 they were more than 70 percent above their trend level. Housing construction rose from its average of 3-4 percent of GDP to over 6.0 percent of GDP. This was at a point when the demographics would have led observers to expect a drop in construction since the baby boom cohort was seeing their kids move away from home and would have been looking to downsize. On top of this, the vacancy rate was already at record levels as early as 2002. It kept rising to new record highs year by year after that.

The savings rate had dropped from a pre-stock bubble average of more than 8.0 percent to near zero at the peak of the bubble. Again, the demographics with the baby boom cohort in its peak saving years would have led one to expect a rise in the savings rate.

Any economist who could look at these monstrous divergences from normality and not recognize a bubble really needs a new line of work. And this is before we even talk about the explosion of the subprime market, the Alt-A market, and the huge number of homeowners buying houses with no money down.

Folks this was really really easy. The economists and other policy types who are trying to say it was difficult to see are just covering their rears.

Comments (11)Add Comment
written by watermelonpunch, February 09, 2013 8:30
It wasn't hard to see. There was just too much money to be made to admit it.
And now, I think there are certain parts of the population who still refuse to admit it, because they don't want a "recovery" they want a return to the bubble - so they can again make mad money.
The party is too fun for some, to agree to not have another.
written by Union Member, February 09, 2013 10:16
"Any economist who could look at these monstrous divergences from normality and not recognize a bubble really needs a new line of work."

Any economist ... really should be out of work. It's only fair, market discipline.
Easy to see, HARD to speak to
written by bailey, February 10, 2013 10:59
Truth is, It is NEVER asy to speak truth to power and it's a huge disservice to DB to minimalize how many times he's done that on critically important issues. Let's not forget it was AG who LOUDLY pronounced there was no housing bubble, and it was BB who sheepishly followed along (even though by then the whole world knew better). ps. I'm not a big Chris Hayes fan but he deserves credit for that "dream panel" this morning. Alexis Goldstein is as good as it gets & DB, as usual, was on point.
If you want to see how bubble denial is done...
written by David M, February 10, 2013 12:10
then check out any of the articles about the Canadian housing bubble. All the greatest hits are there, "The fundamentals are strong", "It's only a localized phenomenon", "The risks are managed", and everyone's favorite "This time it's different"
written by watermelonpunch, February 10, 2013 7:06
@ David M
Sure is a good example, the Canadian mania
"Dr Housing Bubble Blog" has several posts about that.

I know at least 2 Canadians who seem to give the impression that any American warning about a Canadian housing bubble is rather ignorant, because, the Canadian says, "We Canadians don't give loans to people with no money and no way to pay them"... etc etc.

Seems to give the idea that Canadians believe, the only problem with the U.S. real estate bubble, was subprime lending.

I guess tulip investments would've been just fine in the 1600s, if only there wasn't all that fraudulent credit offered to poor people to buy all those tulips.
... and the next one is coming.....
written by Geoff Willis, February 11, 2013 6:41
The main reason the bubble was'nt seen was because it was unprecedented. The reason it hadn't happened before is because the USA traditionally had fixed interest mortgages.
The switch to variable rate mortgages removed a strong stabilising force, and allowed positive feedbacks to move the US housing system, and whole economy, into an oscillating mode.

The experience of the UK, which made the same switch in the early '70s, is that the US is now locked in to a cycle of ever bigger housing booms, and the next next boom is already kicking off (check recent posts on Calculated Risk). Strap your seat-belts on for a ride even crazier than the last one.

For backround information on this see section 6.0 'Dynamic Control of Housing Markets' in the paper here:


In a self-respecting democracy, variable rate mortgages would be strictly illegal.
I saw it coming
written by Lawrence Rupp, February 11, 2013 6:51
Me, ordinary person. Taught College Sociology, worked Public Health 22 years, only investments were in mutual funds.

2004 - 05, convinced my wife it was time to sell her last piece of inherited property, a gem of a 100 acre farm in Jackson NH. It sold January 2006.

written by flowergardener, February 11, 2013 8:57
I saw it coming, shorted (in a small way) mortgage originators/insurers in early 2008 before getting out entirely. What I did not see and what sets this one apart was the cascading effect on lenders and holders of mortgage backed paper AFTER the bubble blew by casting in doubt the value of all US mortgages when much seemingly AAA rated stuff went badly bad. The spillover effect was enormous in terms of reassessing assets, capitalization, manpower, government financial/fiscal plans and so many other areas. Even today the Fed is the principal buyer of GSE MBS.
Of course people saw it comming.
written by Jim A., February 11, 2013 9:43
At a fundamental level, most investors and fund managers believe that THEY are smarter than everybody else. So not only do they think that they'll get out before everything goes to heck, they invest based on the idea that everybody else is dumber than they are. So they make dumb investments (the trend is your friend) and when stuff DOES start to sour, they rush to the exits at the same time.
That Upton Sinclair Quote
written by Winston Smith, February 11, 2013 12:30
Upton Sinclair: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
written by Donald Pretari, February 11, 2013 12:45
I'm pretty sure that, if the Fed Slows the Economy to Prevent a Bubble, Some People in Power will say:1) How can we let one man slow the Economy? 2) How can one man know more than the market? 3) The Fact that there was No Bubble Proves the Fed was Wrong...Etc

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.