The Housing Bubble Was Visible in the National Data

Paul Krugman picks up on a blogpost by Mark Thoma, where the latter argues that academic economists should occasionally listen to those outside the temple. Thoma uses the example of the housing bubble as one case where those outside the temple got it right.

Krugman correctly notes that Robert Shiller, who as a Yale economics professor certainly qualifies as an academic economist, was one of the first (after me) to get the bubble right. He also reminds readers that he also had warned of the bubble. (As I recall, the first time was in 2002, after some other economist raised the issue.) However, he adds that it was necessary to look at local data focusing on areas where the bubble was concentrated.

Actually, it was easy to see the bubble in the national data. Local data could be helpful (obviously prices were more out of line in some areas than others), but there are cases of real house appreciation in locations that become more popular for whatever reason. In principle, an examination of the fundamentals of these markets should be able to reveal a bubble, but the national market provides a very useful anchor. When real house prices nationwide had risen by 30 percent in real terms, after a century of just tracking inflation (I could only trace this pattern for 43 years back in 2002), there was a very good reason to believe that there was a bubble.

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written by denim, July 26, 2011 3:30 PM

I would say my experience with housing says the "bubble" existed even in 1977. I bought a house at minimum down payment and made scheduled payments for a year. Circumstances of moving required a sale. I made enough capital gains to pay for the sum of the original down payment and all mortgage payments. Essentially free living for a year. I rolled it into another house which sheltered it from taxes at the time.

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written by ComradeAnon, July 26, 2011 4:27 PM

I remember hearing the "We'll lend you 120% of the value of your house!" commercials. At that point this old commercial underwriter suspected that something was up. Anyone willing to insure or lend at 120% of an asset's value will soon buy it. (At 120% of it's value.)

The Housing Bubble Was Visible in the National Data
written by sherparick, July 26, 2011 4:47 PM

Denim, what you saw in the 1970s and 80s was a general inflation. All loans were relatively easy to pay off because the value of the principal was reduced by inflation. House prices at times lagged the increase that was going on in income and rents during this period, hence the apparent dips in Case Schiller housing index in the early 1980s and again in the early to mid 1990s. What happen in the late nineties and the oughts is that house prices became unhinged from their traditional relationship with real median income and rent. While the latter two stayed relatively flat, house prices spurted ahead, the bubble being heated by cheap credit that chiefly was betting on the belief that "U.S. prices" only go up. Hence you don't have to worry about income anymore because the asset value would soon be greater than the loan. Until it wasn't (2006-07), and the Minsky moment arrived.

If the data was obvious, why did the ostriches win?
written by Main Street Muse, July 26, 2011 5:08 PM

I agree with this post that the housing bubble was obvious in the data. The question then becomes: why did the majority of economists, bankers, politicians and lenders ignore the obvious?

The level of corrupt thinking and corrupt action in our nation has reached an apex - and we are much worse off as a result. Why so many chose (and continue to choose) to act so corruptly is the real question to examine.

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written by Ron Alley, July 26, 2011 5:40 PM

Denim and Sherparick,

What you saw in 1977 probably had to do with interest rates and assumable mortgages. At that time, most mortgage loans were assumable. Interest rates were rising but buyers could assume existing mortgages, at a lower interest rate than then available rates on newly written mortgages. In many states, the assumption of an existing mortgage was mandated by state law. Assumption of existing mortgages effectively ended in the early 80's.

In addition, most states had effective usury statutes. In many states, usury statutes regulated mortgage interest rates. This too changed beginning in about 1980.

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written by MSM, July 26, 2011 7:13 PM

Yes, you got that one right. And you did a nice job of pointing out the bubble and its implication from looking at the data.

Would you know who might have a clear vision of what is coming our way now?

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written by Peter T, July 26, 2011 8:18 PM

Krugman still claims that he, too, saw the housing bubble - but I think he's making things up: Krugman put ALL emphasis on the land constraints, like near the coast. This housing bubble, however, was so big that even houses in the Arizona desert, the Minnesota exurbs, and elsewhere showed increases in inflation adjusted prices that were far above the historical trend, even in those non-land-constrained areas. Cheap credit lifted all houses until cheap credit went away.

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written by John, July 27, 2011 2:00 AM

Baker, what do you think of Scott Sumner's idea that the housing bubble doesn't necessarily lead to lead an AD shortfall as long as the the Fed maintains NGDP steady?

http://www.themoneyillusion.com/?p=10207

The Housing Bubble Was Visible in the National Data

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