Do bubbles bother Bernanke?
Study cites recent trends that signal housing bubble
Immediate Release: November
Erskine, 202-293-5380 x115
Washington, DC - Recent trends in the housing
market suggest a dangerous housing bubble, rather than a run-up caused by
fundamental factors such as higher incomes and population growth, according to a
new study by the Center for Economic and Policy Research (CEPR).
The report, "Will a Bursting Bubble
Trouble Bernanke? The Evidence for a Housing Bubble," cites three
trends in the housing market that suggest an unsustainable increase in house
prices: 1) A sharp divergence between house sale prices and rents; 2) An
extraordinary jump in the rate of housing construction; and 3) A sharp decline
in the savings rate, driven by a housing wealth effect.
Federal Reserve Board chairman nominee, Benjamin
Bernanke, has argued that there is no housing bubble and, therefore, no reason
for the Fed to take action to address the bubble. Bernanke's approach raises
grave risks, since the impact of a bursting housing bubble is likely to be even
greater than the collapse of the stock bubble. The collapse of the housing
bubble will throw the economy into a recession, and quite likely a severe
recession, according to economist Dean Baker, co-author of the report.
"If the Fed chooses to let a housing bubble
expand unchecked, the eventual cost to the economy and millions of American
families could be enormous," said Baker.
The report, by Dean Baker and David Rosnick,
found three housing patterns that are tell-tale signs of a housing bubble:
- A sharp divergence between house sale prices and rents. If house sale
prices were pushed up by fundamentals in the housing market, it would be
expected that rents and house sale prices would rise together -- but they
are not. The house price index has increased by an unprecedented 51
percentage points more than the rent index since 1997.
high rate of housing construction. The rate of housing construction over
the last three years is more than 40 percent higher than it was in the 17
years prior to the run-up in house prices. This is not caused by the
increase in the U.S. population, since the most rapid growth in the number
of new households actually took place in the 1970s and early 1980s, when the
huge baby boom cohort was first forming their own households.
sharp decline in the savings rate. If house prices move at approximately
the same pace as the overall inflation rate, as was the case prior to 1997,
then housing wealth will have little effect on the savings rate. However, in
the last eight years, house prices have outpaced the overall rate of
inflation. The resulting wealth effect has depressed the savings rate, which
has actually turned negative in recent months.
The Center for Economic
and Policy Research is an independent, nonpartisan think tank that was
established to promote democratic debate on the most important economic and
social issues that affect people's lives.