Was there a Housing Price Bubble? Revisited

In 2005, I thought housing prices were rising above the fundamentals and I said so. In 2008, as the fall in housing prices was well under way, I wrote a blog post and later a NYTimes op-ed saying that the housing price bubble was not nearly as big as people thought. I wrote:

I think that housing prices went beyond the fundamentals sometime around 2004…but 2004 levels are still well above long run trend.

…Prices will probably drop some more but personally I don’t expect to ever again see index values around 110.  Do you?  If we don’t see the massive drop back to “normal” levels then the run up in prices should be described as a shift to a new equilibrium…[with some overshooting, rather than as a bubble.]

To put it mildly, not everyone agreed with my argument. I certainly got the timing wrong–I didn’t think the recession would be as long or as deep as it was. Nevertheless, some people are coming round to my point of view. Karl Smith, for example, has a new post Was There Ever a Bubble in Housing Prices? which concludes more or less, as I did nearly ten years earlier, that the answer is no. What happened was greater liquidity which made housing prices gyrate more like stock prices but “the fundamental driver isn’t irrational bubble behavior. It is competition over a scarce resource.”

Let’s go back to the Shiller graph (now updated to 2018 with some slight corrections since 2017 post). Over the entire 20th century real home prices averaged an index value just under 100 (and over the the entire second half of the 20th century were only slightly higher at 112). Over the entire 20th century, housing prices never once rose above 131, the 1989 peak. But beginning around 2000 house prices seemed to reach for an entirely new equilibrium. In fact, even given the financial crisis, prices since 2000 fell below the 20th century peak for only a few months in late 2011. Real prices today are now back to 2004 levels and rising. As I predicted in 2008, prices never returned to their long-run 20th century levels.

Now one might argue that there is still a bubble or perhaps another bubble in housing prices. But the United States does not look anomalous compared to other countries. In fact, in many other countries prices have risen more than in the United States. Here is the Economist’s Global Price Index of real house prices for a variety of countries. (Do note that some countries not shown, such as Germany, haven’t seen big increases in prices.) Are all these countries experiencing bubbles? Or has the equilibrium changed?

Understanding why the equilibrium has changed is a fundamental issue that I don’t think we yet have a good handle on. My view, is that it’s a combination of expected long-run lower interest rates, greater liquidity, and supply constraints on land. Lower interest rates, for example, mean that durable assets increase sharply in price, all the more so if the rates are expected to stay low. Combine this with greater liquidity (see Smith’s post) and supply restrictions and you can explain most of what is going on in the United States. What I don’t know is if the same explanations work worldwide and can the same factors also be used to explain why land prices haven’t risen in Germany, Japan or Switzerland?

Hat tip: Nathaniel Bechhofer.


Another reason for this new normal may be that the quality of housing has increased in the last 15 years or so compared to houses in the 1980s or before...New houses offer much more comfort, and many old houses have been remodeled to offer more comfort. Think man caves, jacuzzi tubs, decks for grilling, etc.

Also, modern houses offer better insulation, higher quality plumbing, electrical, etc.

I agree, better homes, bigger homes homes with more value. This pushed the average value of homes up above the statistical norm of past years. The problem was not a price bubble the problem was a coordinated effort by the federal government to make home ownership easier for the poor especially the poor people who were unable to manage their money and their credit scores reflected that inability. When a few million of these homeowners began to default on their home payments the inevitable happened and the bubble collapsed.

Um, no.

The bubble was not in Compton, CA.

But there was a housing bubble in areas like Compton too!

Price soared from $200K to $400K from 2000 to 2007 before crashing below $175K in 2009. https://legallysociable.com/2015/01/01/real-estate-sign-prices-in-compton-ca-back-on-the-rise/

People living in places like Compton were more exposed to riskier mortgages (they often had lousy credit and needed exotic mortgage products to qualify for loans). They also had less stable income given their weaker footing in the labor market. It makes sense that a downturn in the economy would lead to a more dramatic decline in such neighborhoods.

Subprime lending was a real problem and it was highly concentrated among borrowers with poor credit. By 2009, the default rate on sub-prime adjustment rate mortgages was 40% compared to around 5% for fixed rate, prime mortgages.

Keep in mind that those with ARMs had lower interest rates than fixed mortgages would have given them for the entire period up to and including today. Maybe more accurate to reference teaser rates

A 500 square foot one bedroom house in Compton sold in the fall of 2007 for $340k, or $680 per square foot.


That would be over $2 million for a 3,000 sf house, and you'd still be in Compton.

The reason Compton was hot in 2007 is not because it's a famous black center, but because it has been turning Latino. The Housing Bubble was intimately tied up with optimism over Latino immigration. (Purely black cities like Detroit had some home price appreciation in percentage terms, but it was small in real dollar terms because homes in black neighborhoods were so low priced by then that they didn't matter much in absolute terms.

But the increase in housing quality in the 20th century puts recent improvements in the shade: electricity, indoor plumbing, central heat and often air conditioning, refrigeration, gas or electric ranges and ovens, laundry facilities... man caves and grill decks seem, pretty trivial next to all that.

Exactly. Attributing a today's higher prices to housing improvements since 2000 is misplaced. If quality improvements are the motive force, what of all the many, many improvements of the 20th century that did not change real prices?

But then might you expect older homes (like mine) to be a bargain compared to similarly sized newer ones?

Perhaps, but there's also an aspect of the fact that old homes existed in smaller sizes which really aren't built nowadays. New developments rarely have one bedroom one bath single story houses, since the difference in value between such a house and a larger one is significantly higher than the difference in cost of building. A 5,000 square foot 3 bedroom home is worth well more than twice the price of a 2,500 square foot 3 bedroom, almost 150% of what a strictly linear price curve would show in my area. The same nonlinear price curve applies at smaller sizes, but I used larger numbers to emphasize the magnitude of the difference from linearity. Add to that the fact that every home listing I could find in my area for under 1,000 square feet was built before 1980, and it becomes fairly clear to see how the supply of reasonably priced homes is dwindling. The high price of land adds a fairly large fixed cost, incentivizing the construction of such large, more profitable homes, meaning that unless demand for such homes falls, and it shows no signs of being in decline, the average size of a home, and thus the average price, will continue to go up.

First of all there were some prescient folks who called the 'bubble' very early on including Dean Baker and the Calculated Risk duo of Bill McBride and the late Doris Dungy. I don't think that it was competition over 'scarce resources' but rather a classic bubble situation (it's worth everyone's time to go back and read Charles Mackay's classic 19th century tome, "Extraordinary Popular Delusions and the Madness of Crowds" which covers some really nice bubbles such as the the Dutch Tulipmania, the South Sea and the Mississippi Company. You can find a free copy over on Project Gutenburg). Lots of investors were just in it for the quick turnaround (I think there was a television show called 'Flip that House' or something like it). This coupled with the extraordinary bad behavior of the mortgage lenders (the classic NINJA loan) contributed.

I think the bubble was less about homes and more about financial instruments. Namely Wall Street thought that they had discovered a magic way to spin riskless securities out of very risky loans. There was a germ of truth in this belief. You can take individually risky loans and create a set of securities from them that range from almost totally riskless to super high risk. This is an innovation that opens up the door to more loans that poorer and riskier people would not have been able to have in an earlier age. But the 'sausage' was made in a black box without the creators or buyers really understanding what they were trading and assuming it was all pure, riskless, gold they were spinning.

Why is it either-or?

Those financial instruments had home mortgages at their core. These mortgages were not well diversified in the MBS portfolio. They were subject to systematic risk in geography, funding, exposure to labor markets and timing.

The bubble would have occurred without securitization, but those securities spread the damage out and obscured a lot of the risks.

No, without securitization the bubble would not have occurred. Only by bundling fraudulent mortgages together(and have the ratings companies ignore the fraud) could this fraud have been unnoticed by investors.

Yes, there would too have been a bubble. It simply wouldn't have been as large in the absence of securitization, nor as widespread in its effects.

The vast majority of mortgages were not "fraudulent" including those that defaulted. You talk simplistically like an OWS street urchin with no understanding of the problem.


Think Citi was an outlier? You need to get out more

"The delegated flow channel purchased approximately $50 billion of prime mortgages annually.
These mortgages were not underwriten by us before they were purchased. My Quality Assurance
area was responsible for underwriting a small sample of the files post -purchase to ensure credit
quality was maintained.

These mortgages were sold to Fannie Mae, Freddie Mac and other investors. Although we did
not underwrite these mortgages, Citi did rep and warrant to the investors that the mortgages
were underwritten to Citi credit guidelines. In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective.

Because Citi had given reps and warrants to the investors that the mortgages were not defective,
the investors could force Citi to repurchase many billions of dollars of these defective assets
This situation represented a large potential risk to the shareholders of Citigroup."


Somehow I missed all the Hispanic borrowers impact in there. You need to understand that if the government had not seized F&F, the inevitable result would have been the forced repurchase of these defective loans and the end of almost every investment bank in the country,

That McBride and Dungey "called" the bubble is a myth supported by revisionist history. Their blog began in 2004, well after the bubble had already inflated.

As early as January 2005, they did use the word "bubble" but the post was phrased with a question mark, and they concluded by referring to a NY Fed paper claiming the housing prices were supported by fundamentals.

A few months later they reported what others were saying and interpreted it as a bubble.

McBride and Dungey could conceivably have foreseen a bubble before the launch of their blog, but there is no evidence to support that. They also may very well have spotted oddities in the market that were also obvious to everyone else, such as the widespread use of affordability products.

They used the R word, Recession, as early as 2005, but we didn't enter recession until 2008. If you call a recession every year, eventually you get it right.

I do believe they deserve credit for being early adopters of the bubbular view of the housing and finance market, but realize that their insight was several years too late. Recognizing the bubble close to the market PEAK of June 2006 is not particularly prescient. You were a wizard if you recognized the growing bubble pre-2004. That's when all of the policies and products that fueled the bubble were put into widespread use. In the hottest markets, buyers were making all-cash offers 10% over asking price as early as 2003.

I don't claim to have foreseen the bubble. My conservative investment strategy obviates the need for market timing. I just find that people's claims to have foreseen it are not supported by their contemporaneous statements. At best, they were doubtfully pessimistic.

'but there is no evidence to support that'

Tanta was talking about the quality of the mortgage making process, which ties into Boonton's point about financial instruments.

Basically, the 'housing bubble' was a financial bubble, one based on some extremely questionable (not to mention illegal) practices that were tolerated for years, until the bubble popped. AIG being a prime example. Not to mention that calculatedrisk was also looking at things like equity ratios, or rent/own difference.

Basically, starting with Tanta becoming a regular contributor, the entire rottenness at the foundation of the real estate boom was detailed, using both her own experience in the mortgage industry, and various data sources.

I note that you avoid mentioning WHEN Tanta talked about this. Everyone has perfect hindsight...well, most people. The issue is how much foresight she had. My contention, supported by the timing and statements in their own blog was that they were late, albeit earlier than many people, in recognizing the problem. They were anywhere from two years to ten years too late.

As Alex points out here, we might still be in a housing bubble. This is exactly what we faced in the wake of the Dot Com bust when house prices in California fell for five years, and then had a heated recovery. The lesson isn't that we had two separate boom-bust cycles, but that we were in one BIG one that began in the mid 1990s. The Dot.com recession was a minor release of energy - a foreshock.

It was not merely a financial crisis. That's OWS propaganda. Those financial instruments were derived from mortgages. If the mortgages were good, all those derivatives would have been good or even better. This was a bubble caused by over investment in long term assets, funded with enormous and unsustainable amounts of debt.

I had never heard any claims that McBride and Tanta called the bubble early.

In terms of hindsight, you would be well served to read all of Tanta's work on how the banks created the bubble, as it would appear that ten years after the fact you still do not know what Tanta talked about more than a decade ago.

EMichael: "I had never heard any claims that McBride and Tanta called the bubble early."

Alan Goldhammer: "First of all there were some prescient folks who called the ‘bubble’ very early on including Dean Baker and the Calculated Risk duo of Bill McBride and the late Doris Dungy."

I have read every word of what Tanta posted on Calculated Risk, and I believe most of it. I disagree with her to the extent her view of the problem was narrowly confined to the scope of her own field of view and expertise. She did not have a sophisticated understanding of international capital flows and how they played into this. She and McBride are also apologists for government intervention to promote widespread home ownership using affordability tools that were the but-for cause of this crash.

It simply doesn't matter how opaque and fraudulent derivative securities are if the underlying assets are sound. The problem is that the mortgages were unsound and then securitized in opaque ways that gave the illusion of safety. But the yields on these securities broadcast to the world just how risky they were. And naive investors ignored those price signals out of greed, trying to get high yield on ostensibly safe assets.

I gave Dungey credit as far as credit was due to her. She was an expert in a narrow market at the heart of a crisis. But she was by no means unique. Home builders were retreating from the market before she ever went to print with the possibility of a bubble.

If you wanted to know what Dungey knew about housing finance, all you had to do was walk into a bank in 2003 and ask about getting a mortgage on a high priced property. The loan officer would spread the murder weapons on the desk in front of you.

'I note that you avoid mentioning WHEN Tanta talked about this.'

Apart from writing this - 'Basically, starting with Tanta becoming a regular contributor.'

So, I checked the date on that, which was apparently December, 2006 - http://www.calculatedriskblog.com/2008/12/in-memoriam-doris-tanta-dungey.html

Of course, she was writing in the comments considerably before that. And the fact that she died about almost two years later did cut off her posting. Nonetheless, you are welcome to read for yourself - http://www.calculatedriskblog.com/2008/12/compendium-of-tantas-posts.html

@Prior test 3

House prices peaked in June 2006. The fact that Tanta began writing posts for CR in December 2006, as you state, demonstrates my point that she did not predict this housing crisis, at least on CR. The crisis was already a fait accompli.

I conceded that it's possible that Tanta and McBride could have predicted the crisis PRIOR to publishing on CR, but I've seen no evidence of that. Indeed, everyone who gives them credit for prognostication invariably points to CR as evidence. But we see that as of January 2006 they were only dabbling with the notion of a bubble, and in some ways dismissing the claim altogether.

If house prices peaked in June 2006, the market was clearly overvalued years before that. The subsequent drop put house prices back to 1999 levels in the worst markets. This tells us the bubble began as early as 1999, possibly later because of overcorrection.

I credit Tanta for knowledge. But in my view she doesn't get a Nostradamus Award. She was merely one of the first people to feel the rain when God sent the great flood to destroy the wicked. She was no Noah.

'demonstrates my point that she did not predict this housing crisis, at least on CR'

What I wrote was that 'Tanta was talking about the quality of the mortgage making process, which ties into Boonton’s point about financial instruments.'

She predicted, and fairly accurately, much of the conditions that led to the collapse of an entire industry, at a cost which still dwarfs any previous financial implosion in human history. We have seemingly just all pretty much agreed to just ignore rampant fraud when looking at that time period.


You keep using that word, "predict." I think it does not mean what you think it means.

You are still making the claim that Tanta spoke about problems BEFORE they became widely known, yet you provide no evidence. The imprudent lending had been going on for YEARS before she first wrote about it in 2006. Describing the effects of a tsunami while standing near the beach AFTER the tsunami hits is not a "prediction," it's just "breaking news." She gets credit for the scoop. Clearly she wasn't the only one aware of the bad lending practices. Everyone engaged in them knew about it. No one cared.

Calling it "fraud" suggests that there were culprits and victims. The problem was that EVERYONE was eating the BS sandwich. No one cared. The borrowers knew they couldn't meet the loan terms if house prices and refi opportunities collapsed. The lenders knew it too. They both severely discounted the probability of that happening to suit their caviar dreams.

The crisis was a group effort, and people who play the victim card are deliberately trying to obscure that fact for their own benefit.

It is why i wrote "had". As this was the first time.

January 2005 was the month that Housing Bubble went nuts. Angelo Mozilo's Countrywide issued a press release on 1/13/2005 announcing a pledge to loan to minority and lower income borrowers by 2010 one ... trillion ... dollars.

This was because Mozillo had talked Daniel Mudd of Fannie Mae (?) into buying his more dubious mortgages a few days before.

The earlier the bubble calls, the wronger.

This guy gets it!

Only to the extent of one's ability to profit from the bubble.

From a beneficent policy making point of view, identifying a bubble early is essential. The only thing more important is never being in the bubble to begin with.

But unfortunately, policymakers benefitted from the same bad incentives that everyone else had. It's not that they failed to take away the punch bowl, but that they were guzzling from it themselves. Tony Montana had good advice in this regard.

Location. Location. Location.

All real estate is local. God isn't making any more of it. And, it cannot be moved.

National statistics are less useful than local prices skyrockets. The Grounds Zero of the 2000's housing bubble were areas of AZ, CA, FL, MI, etc. There price increases were huge.

Anecdotal: I'm seeing rapid rises in NY suburban housing prices, largely resultant of low rates and pent-up demand.

Of course, no one in 2004 to 2006 could have seen it coming. I mean no one could see that housing prices were soaring while GDP growth, real median family incomes, etc. were static . . .

Many factors contributed. No one actor is innocent. And, it could not have happened without the Federal government.

I agree totally. Government was the but-for cause of the housing and financial crisis.

I also think the housing bubble remains, particularly in certain markets. There is too much optimism that all the excess supply was burned off from the massive recession. People are still attracted by the relatively high yield of real estate, its store of value, and use as a commodity.

The flip this house, flip that house TV shows are still playing and still popular. The difference now is that only investors are getting to play.

Low interest rates will be the death of us.

Well, I was really with you in your opening thoughts, thinking how nice it was to see a poster actually seeing the bubble for what is was in terms of location.

Then, the obligatory Federal government did it meme.

This is so wrong it should not be repeated. GSEs lost 40% of their market share during the bubble. Lending under the Community Reinvestment Act reached its peak more than a decade before the bubble and declined from that point right through the bubble.

So good start for you, horrid finish. But at least you did not bring up Ed Pinto. Yet.

About half of mortgages during the bubble were low-FICO subprime loans. And GMU's own says:

"Fannie and Freddie bought 25.2% of the record $272.81 billion in subprime MBS [mortgage-backed securities] sold in the first half of 2006, according to Inside Mortgage Finance Publications, a Bethesda, MD-based publisher that covers the home loan industry.

In 2005, Fannie and Freddie purchased 35.3% of all subprime MBS, the publication estimated. The year before, the two purchased almost 44% of all subprime MBS sold."

So subprime lending was half the market and the government was backing half of subprime lending. Maybe the bubble would have happened anyway, but the government had a very big thumb on the scale.

You are going to have to give me a link. Hopefully that is not Pinto's sub prime.

How do you then account for the difference in performance between private and GSE sub primes?


"About half of mortgages during the bubble were low-FICO subprime loans."

This is not remotely close to being true.

BS EMichael.

Fannie and Freddie were still ranked Number 1 and Number 2 in asset securitization with Countrywide in a very distant third place. Fannie and Freddie sponsored more securitizations than the top 10 private labels combined.

F&F retreated slightly from the housing markets for two reasons. First, they were embroiled in accounting scandals. Second, by 2004 and beyond, only the dumb money was chasing housing wealth. F&F cherry picked the best mortgages from the origination pool, leaving every other securitizer with the residual market consisting largely of non-conforming loans. No kidding F&F had better results than private labels! F&F are a classic example of a duopoly market.

CRA clearly didn't cause the crisis by itself. CRA was one government policy out of many others that promoted home ownership through the use of affordability products and government subsidies and regulation. In the absence of CRA, far fewer minorities - the people who suffered the worst losses - would have bought into the bubble. Moreover, even banks that were not subject to CRA received affordable housing credits, in particular Countrywide.

CRA played a substantial role in the buildup of mortgage origination from 1996 through 2000. But in 2001, Fannie and Freddie increased their market share dramatically, leading us into a bubble. The majority of these loans were prime loans, but later in the cycle the subprime loans disproportionately led originations. And of course subprime loans were the FIRST loans to go belly up after the market began tanking in June 2006. Those loans had the worst fundamentals of capacity and collateral. The jobs held by subprime borrowers were also the most cyclical. They were the FIRST people laid off.

Dude, the market was pushing F/F. Get your shit straight.

It is hopeless.

They show all this smoke, they refuse to see the fire.

Fannie was slowed by accounting scandals thru 2004. Daniel Mudd became acting CEO about 12/21/2004 and shortly after went to see Angelo Mozilo of Countrywide, the most aggressive mortgage originator.

Mozilo's grand strategy was to boost Countrywide's share from about 10% to 30% of mortgage originations in order to develop some monopoly power to make higher profit margins. Mozilo felt that minorities, especially Hispanics, as well as, to a lesser extent, lower income whites were underserved due to unfair prejudices about their creditworthiness.

According to a 2008 New York Times article, at some point between 12/21/2004 and Mozilo's pledge to lend one trillion dollars by 2010 to minorities and lower income borrowers, Countrywide and Fannie Mae met and Mozilo bullied Mudd into agreeing to let him unload many of Countrywide's more dubious loans on the huge GSE. Read:

Pressured to Take More Risk, Fannie Reached Tipping Point


That Countrywide-Fannie Mae alliance around New Year's 2005 opened the floodgates to the craziest years of the Housing Bubble: 2005 to mid-2007, as the quality of new mortgages dropped steadily.

So, ya' think Mudd bought these loans because of some silly little push about home ownership or did he buy these loans so he could make money? Personally, I believe Mudd should have have been indicted for his stewardship, as he plainly ignored what was going on. However, his decisions were in no way impacted by any kind of push from the government.

Course, you could show me that his purchases were done to meet these "guidelines", by actual numbers.

"and supply constraints on land."
As my father used to say, "buy land, son, they are not making more (well, much of our neighborhood is actually reclaimed land, but you get his point, I am sure)"

They ARE making more land. They are building UP. They are converting garages. They are making useful living space out of swamps.

Don't make the same mistake as Khan Noonien Singh. That got him killed.

It is completly different. It can not affect my inveatiments. There are limits to how much people can build up (by the way, it is illegal to build more than two floors where I live - supply will never catch up with demand). Land is bough and sold in a horizontal way. It is not outer space, we live at the surface of a globe, basically we live in a two-dimension world.

There is a huge amount of empty land in the world. Only a tiny, tiny portion is in demand as a place to live/work. Property investments are bets that those areas will continue to be in demand--no sure thing.

And as usual with investments, you have to beat the other investors to win. If there is a "sure thing" to be valuable a long time from now investors will already have bought it up and that will be reflected in the price.

That is why I got early in the game, to beatthe newcomers. Either they play ball my way or they do not play ball. As long as Brazil exists, my properties, modest as they are, will retain value.

Thiago, no. My admonition is that we do NOT live in a two dimensional world. Market experts understand this. Multifamily housing is measured in units and sold by square foot regardless of elevation. Elevation is considered a valuable asset. Commercial real estate is sold by square foot and occupancy rates include the Y axis. Land values take into account current and expected zoning laws that make tall buildings possible.

As Dan said there is also a huge incentive in a sharply rising market to encroach on virtually worthless land, including swamps, farm land, desert, and reclaimed bodies of water.

Clearly you are correct that the most space constrained and quantity constrained markets (Manhattan, San Francisco, Honolulu) are going to rise quickly in price and rent. But even these markets reclaim space by building upward, refitting garage space, subdividing, condo conversion, etc.

Ignore the third (and fourth) dimensions of land supply at your own peril.

It is not applyable to the markets I invest in. Brazilians are not Japanese, Brazilians don't like rabbit hutches, Brazilians like space. Also, the law will prevent people from building big buildings in my city. They won't interfere with my rents.

I'm speaking about real estate generally. I'm making no comment about your particular conditions and investments. I personally wish you great fortune even though I believe some physical characteristics can never be completely avoided. During the Korean War, the tallest building in Seoul was three stories. Look at it now. Cultures can and do build upward very rapidly. Shanghai is another example.

It is different. Asians (except Filipinos and Mongolians) care about money above everything else. Brazilians' values are different. We will never sell our firstborn right for a mess of pottage.
And the important thing, in general, is getting a hold on good land. It does not matter if people build on it or below it, one can make money.

There was a big bubble in racially integrated exurbs in the Sand States of California, Arizona, Nevada, and Florida. The upscale white suburbs of those states, in contrast, did fine.

In general, the Housing Bubble was a bet on America's most sacred cow: Diversity, especially Hispanic Diversity. George W. Bush, Angelo Mozillo, Kerry Killinger, all wanted to believe that what was holding Hispanics back was benighted prejudice about lending them enough money.

Unfortunately, it turned out that Hispanics couldn't generally afford half million dollar houses; and the people who could didn't want to live next to a lot of Hispanics in the middle of nowhere.

A lot of studies by economists since then have validated my 2007-2008 analysis, but diversity is even more of a Sacred Cow than a decade ago, so it's not clear that we've learned our lesson.

I read "White Trash: The 400 Year Old Untold History of Class in America" by Nancy Isenberg, and "Hillbilly Elligy"

Did you?

The biggest losers in the housing crash were Hispanics buying relatively low priced homes. This means that they made the worst buying decisions of any investors. In no small part this was caused by government programs aimed specifically at them to encourage home ownership. To a somewhat smaller degree, Blacks suffered the same fate.

The biggest losers were anyone that put 20% down at the height of the bubble because they could't just walk away. Ironically the no money down NINJAs made more responsible purchases (at a personal level).

Rational does not equal responsible.

Beyond silly.

Do you understand that more than half the houses sold in the bubble areas were not owner occupied?

That fact has no bearing on this question. Housing demand consists of both prospective owners and investors, subprime as well as prime, conventional as well as unconventional loans. There are of course some market segmentations along these lines, but total market demand and house price indices do not care about such distinctions. A house sold for $500,000 is a house sold for $500,000. The demographic and economic characteristics of the buyer and his motives are irrelevant. But those factors matter crucially in how the subsequent collapse unfolds. The least capable and collaterlized borrowers got hit the hardest. Of course they exercised their option to walk away and suffered less of a credit hit than their more credit worthy peers.

In a great many cases the people who "walked away" were people who were not living in the house. It's a lot easier to cut and run when you're just screwing over your renters, not having to move out yourself. And this goes to the fact that "flipping" was a huge driver (no, not the only one-- HELOCs mattered a lot too) in the hottest markets. I was in Florida during the bubble years (St Pete and then Ft Lauderdale). It was not poor people who were buying up multiple properties in hopes of holding them for a couple years and then making a killing. It was solidly middle class people who had enough of a nest egg-- and, very often, a good credit rating-- which allowed them to get in on the ground floor of the craze. Often enough the rent on these properties could not cover the PITI payments* so the owners were taking monthly losses. When property values sank like a rock in 2007-08 and dreams of six figure profits went *poof* the owners did the "rational" thing and let the property go back to the bank. Yes, it murdered their credit rating, and they were out a lot of money, but unlike people who lost their own homes later (due to the great holocaust of jobs in 2008-09) they did not suffer foreclosure and eviction on their own home.

* This was the case with the house we rented in Ft Lauderdale: we paid $1600 a month the flipper landlady was paying out $2400 a month-- do the math.

"The biggest losers in the housing crash were Hispanics buying relatively low priced homes."

Right, but the key word is "relative" since about 7/8ths of the lost home values in 2008 were in the four heavily Hispanic and quite expensive Sand States of California, Arizona, Nevada, and Florida. California Hispanics defaulted on a lot of mortgages in the $400k range, which was cheap by California standards, but expensive by national standards. The other three states were in between California and the national average.

Then the events of 2008 led to a national recession that drove down home prices nationally, but a key part of the causal story was the Housing Bubble/Burst in expensive heavily Hispanic states (i.e., not cheap Texas) due to over-optimism by the American establishment about Hispanics.

George W. Bush began pushing against traditional credit standards such as down payments and documentation of incomes at his 2002 White House Conference on Minority Homeownership. His warning to federal regulators that giving the gimlet eye to hogwild lenders could be seen by the President as racist helped launch the moderate Bubble of 2004, which helped Bush boost his share of the Hispanic vote from about 35% to about 40% by providing lots of lending and jobs in Hispanic areas to construction workers and Spanish speaking realtors and mortgage brokers.

If Bush and Rove had been cynical enough to put the brakes on their scam right after re-election in 2004, not that much harm would have been done. But as Texans, they didn't understand how absurd housing prices were in California and the other Sand States. Instead, everybody who was anybody thought the mild success of Bush's Fight Racism by Lending More strategy in 2004 meant that they should double down in 2005 and beyond.

A dozen years later, almost nobody yet understands how the Bush/Rove political strategy of winning over Hispanics interacted with the Housing Bubble. Even intelligent people develop a bad case of Crimestop when considering that our age's most sacred cow, diversity, can have unintended consequences.

You have shown absolutely no proof about the role of Hispanics. According to you, these hispanic landscapers fooled the Goldman Sachs of the world.

I was in Phoenix throughout the bubble. I saw nothing close to what you talk about.

Indeed. There was a housing bubble generally, and there was a super big housing bubble where you mentioned.

There was a small housing bubble in great centralization real estate, but the long term fundamentals in those areas are so good they recovered quickly and then some.

I know friends that are still down 20%+ compared to their bubble purchase, that sucks.

Meanwhile, my friend in Boston just bought a house for way more then it was going for during the bubble.

"Upscale white suburbs did fine".

Well, I moved to Scottsdale in 2003. The idea that these "Upscale white suburbs did fine" seems to have missed Scottsdale.

Anecdote. Arizona was among the four states worst hit by the crisis.

And breaking down the losses in home value by price tranche, high value homes did far better than low value homes. I don't have the data immediately in front of me, but I'll bet Scottsdale did well compared to the rest of the state and indeed better than Phoenix.

The high-value homes of wealthy: sure. The owners had enough to cover the payments and were generally not impoverished by job loss.
In middle class areas it was a different stories. (middle class= people making somewhere in the mid-most quintile of the income distribution, emphatically not people with six digit incomes)

Yes, to a point.

The real difference in this area is that those owners could cover the payments, and they also had the ability to orchestrate short sales with their servicer. While the investor(on the mortgage) took a big hit, it was far less than a foreclosure hit.

Really common in parts of Phoenix, but particularly so in the more expensive parts of the valley. I actually saw a short sale that was bought by the wife of the man who was on the mortgage. She paid $150g's less than the outstanding mortgages.

You would lose your bet on Scottsdale. Go back seven years and you could not swing a dead cat without hitting a short sale.

The bubble didn't hit heavily-Hispanic New Mexico or Texas very hard, so I think that's at least an oversimplification.

That's true, but that result stems mainly from the fact those states didn't have big bubbles to begin with. All people, regardless of ethnicity, did better in those states.

If you look at mortgages nationwide, Hispanics got clobbered worse than any other demographic group.

Home prices in Texas remained way below the national average at levels that Hispanics could more or less afford.

A heavily Hispanic America will need a cheap Texas style system rather than an expensive California style system.

California is trying to deal with this long term problem by pushing its Latinos out onto other states and replacing them with higher potential Asians and the like.

How does a state "push" an ethnic group out of the state?

By lowering their standard of living by allowing housing costs to rise is one obvious way.

"Allowing" them to rise? Trying to stop them from rising sounds like a Venezuela thing.

My parents are in construction, and one data point they saw in the early 2000's which (to them) indicated a bubble was the wide variety of "flip this house" shows where some married couple would stumble into a fixer-upper, stumble around breaking things and doing a lot of very bad "DIY" construction, bring in some contractor to help them fix what they broke, then sell the house a few months later at a huge profit.

My parents opinion: that much "stupid money" cannot last forever.

But at the time a lot of people my parents worked with thought the idea of a housing bubble was ridiculous and this was the new normal. They believed land use restrictions combined with population increases made higher housing prices a simple fact of life--and because of that, the bankers my parents knew believed it was fine to lower standards for making a housing loan. After all, if the value of the house will continue to go up, it reduces the risk that a foreclosed house will entail a large loss--and in some markets, even a trashed foreclosed house would turn a profit.

It's why I get so irritated when I hear people trying to blame banks or Democrats in congress or whatever on the housing bubble. The fact is, it was everyone's fault. The handful of people who thought there was a bubble were decried as paranoid idiots right up until the first wave of ARMs went into foreclosure.

Remember this blast from the past? https://mises.org/library/housing-bubble-myth-or-reality

Now it could be that today, land use restrictions--imposed by governments, by geography and by transportation logistics (which limit the desirable size of a city to what one can cross in a car in half an hour or so)--is driving up the price of housing. It would explain the rise in housing prices in Europe, where similar land use restrictions exist.

Or it could be a lot of people in places like China are parking their money in hard assets, uncertain of the stability of their own economies. (We see this in places like New York and Los Angeles, and increasingly even in smaller markets as well.) The nice property of an American house to a Chinese businessman is that it represents a secure asset that can be liquidated relatively quickly.

If it's the later, then we may be living in another housing bubble--driven by outflows of capital from China. And if that's the case, this bubble will last right up until something snaps in the Chinese economy (which arguably cannot be propped up by the Chinese government forever)--at which point we'll see a re-run of the bubble pop in 2008 as those Chinese businessmen try to get their money back out.

By the way, to be clear, I would consider the bubble not the long-term trend, but the peak where the index nearly hit 200 in the mid 2000's. The long term trend is definitely upwards--but I suspect closer to the line formed by drawing a line at the troughs in the mid 1970's, mid 1980's, mid 1990's and the bottom of the index in 2011. Excesses above this line may represent a pricing bubble. (Interestingly enough, that line, if drawn backwards, intersects the valuations in the 1920's.)

The bubble begins when you first start blowing, not when it pops.

Sorry, I wasn't clear.

If you draw a line roughly passing through the troughs of the 1970's, 80's and 90's as I did with the graph at the link below, it suggests that perhaps the "correct" asset price for houses through 2000's was perhaps around 125ish. To me, the entire spike starting in the late 1990's above the 125 level represents the bubble inflation. It hit a peak in 2007ish--and then "popped", in large part as a result of 5-year ARMs flipping from fixed to adjustable rate, and flipped with nosebleed rates few who owned those ARMs could afford.

It's why the bubble took roughly 5 years to inflate and pop (because 5-year ARMs), and it's why it took roughly another 5 years for things to recover enough to start seeing a normal economic recovery. (Again, because of a backlog of 5 year ARMs which continued to reset during the downturn.)


To be more precise, the ARMs were recast, not reset. I don't want to be pedantic but the distinction is not trivial in this context.

The main problem was the inability to refinance these loans once the loans recast. Both borrowers and lenders relied on the assumption that refi opportunities would exist. Few of these borrowers had the capacity to repay under the terms.

Those TV shows were indeed a symptom. Those shows are still on TV.

The Democrats started it with Bill Clinton's national housing strategy in 1996. George W. Bush continued that strategy with his Ownership Society. Democrats in Congress continued to promote expansion of home ownership through Fannie, Freddie and Home Loan banks.

You are correct that everyone was complicit. But the match was lit by Bill Clinton. One could (correctly) argue that America's obtuse fascination with housing began much sooner: post WWII and even post Civil War. But those booms/bubbles were modest by comparison. Affordability products and securitization were equivalent to inventing high explosives as a replacement for gunpowder.

Democrats were still using the word "affordable" even after the housing and financial collapse. Indeed, they had a 'hair of the dog' remedy.

'national housing strategy in 1996'

Almost as if the 80s real estate boom and bust (remember S&Ls?) never happened, right?

'The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995: the Federal Savings and Loan Insurance Corporation (FSLIC) closed or otherwise resolved 296 institutions from 1986 to 1989 and the Resolution Trust Corporation (RTC) closed or otherwise resolved 747 institutions from 1989 to 1995.' https://en.wikipedia.org/wiki/Savings_and_loan_crisis

The S&L crisis concerned mainly COMMERCIAL real estate.

Well, the RTC concerned itself mainly with commercial real estate.

However, some more from that wikipedia article - 'The damage to S&L operations led Congress to act, passing the Economic Recovery Tax Act of 1981 (ERTA) in August 1981 and initiating the regulatory changes by the Federal Home Loan Bank Board allowing S&Ls to sell their mortgage loans and use the cash generated to seek better returns soon after enactment; the losses created by the sales were to be amortized over the life of the loan, and any losses could also be offset against taxes paid over the preceding ten years. This all made S&Ls eager to sell their loans. The buyers – major Wall Street firms – were quick to take advantage of the S&Ls' lack of expertise, buying at 60% to 90% of value and then transforming the loans by bundling them as, effectively, government-backed bonds by virtue of Ginnie Mae, Freddie Mac, or Fannie Mae guarantees. S&Ls were one group buying these bonds, holding $150 billion by 1986, and being charged substantial fees for the transactions.

In 1982, the Garn-St Germain Depository Institutions Act was passed and increased the proportion of assets that thrifts could hold in consumer and commercial real estate loans and allowed thrifts to invest 5 percent of their assets in commercial loans until January 1, 1984, when this percentage increased to 10 percent.

A large number of S&L customers' defaults and bankruptcies ensued, and the S&Ls that had overextended themselves were forced into insolvency proceedings themselves.'

Sound familiar, even if the mix of home and commercial mortgages may not have been identical?


Exactly. Also, there was a boom in commercial lending fueled by the investment bank fraud. And in credit card securitization. And in auto loans.

But they have to ignore that cause they cannot find a quote from a pol saying we have to get more of "those people" cars and credit cards.

People should look at what happened to HSBC's auto lending group(among many others) during this period of fraud. Problem for these banks was that auto defaults happen quicker; repos are quick; and you cannot include a dead loan in an ABS. They took huge losses. And not one GSE loan among them.

I often see this housing goal crap. Strange, there is never one single mention of exactly what these goals were. Also, not one single mention of the penalties the GSEs would be subject to if they did not meet their goals.
If you are going to make a claim like this, you have to show those two things.

No, let's be clear.

When I mean "everyone was complicit", I mean EVERYONE, from the DNC and GOP leaders in Washington to the CEOs of the banks, to the officers in charge of setting lending standards (who often work glove in fist with the regulators in D.C.), down to the mortgage brokers and bankers at your local branch, to the city and county politicians and building code enforcement guys, down to the land developers, building contractors, roofers, plumbers and hell, the poor apprentice who was just learning how to frame a house, and yes--the slob who bought a house on a 5/25 ARM believing he could flip the house before his low cost mortgage went adjustable and make a profit. EVERYONE was complicit in that EVERYONE believed the game would never stop--and they made decisions accordingly, from borrowing hundreds of billions against the single largest capital asset class not knowing it was overpriced, to borrowing money on businesses thinking the construction work would never end.

An asset bubble doesn't happen because a handful of folks yank the marionette strings causing millions of people to dance the stupid dance. An asset bubble happens because everyone is stupid, because no-one sees the game coming to an end.

I mean, think about it: if everyone believes--to the point where even the strongest doomsday predictions by those who think the game must end is "well, things may slow down a bit" (Greenspan)--that housing prices will never fall, then the idea of leveraging that for political gains makes perfect sense. (And don't tell me "they should have known" because NO-ONE knew--that's an asset bubble by definition.) So blaming Clinton or Bush for "lighting the match" or whatever is just passing the buck for our (and your--if you're older than 30 you probably thought the game would never end either) collective stupidity.

Exactly, spot on.

Right I believe he leaves out the worst contributor to the crisis which was Wall Street.

What really got things going was the fact that we did not have a "normal" recovery from the recession of 2000-01-- jobs and incomes did not bounce back. Housing was used, by a whole lot of players both in government and out, to make up for that dire fact.
There really was a cast of millions in this rogues gallery. Blaming any one president (Bush or Clinton) is partisan nonsense.

"Housing was used, by a whole lot of players both in government and out, to make up for that dire fact. There really was a cast of millions in this rogues gallery. Blaming any one president (Bush or Clinton) is partisan nonsense."

Indeed, both sides of the aisle and a lot of bureaucrats were involved over a period of decades.

I recall in the end Fannie and Freddie were following Wall Street that backed and securitized many times more defaulted (subprime) mortgages than Fannie and Freddie. How does that fit with you narrative?

Well said, WW. True bubbles are fairly rare, and when they happen there's no one "cause". A lot of factors have to get involved to make a normal housing price runup turn into a cataclysmic bubble collapse. Those that try to pick one cause are just trying to club their usual partisan hatreds with it. It's much easier for partisans to keep blaming those bad guys on the other side (Dems! Reps! Statists! Capitalists!) rather than doing the difficult work of thinking about how things actually work.

This would be funny on any other day, but it is tragic today. You are the guy who has been telling us for more than six months that things will be fine, because they can never be as terrible as "partisans" believe. Well sadly, real estate markets and presidencies do not behave neatly to confirm your "even handed" bias. In those time series there are varying degrees of dysfunction that cannot in fact be dismissed with the one size fits all answer that "only a partisan would complain."

Oh my god you are such a whiny baby. Dude, things ARE FINE. Even with a shitshow presidency, things are FINE. And not much different than if Clinton had won. Jeebus, are you so insecure you can't just let some people not be in a panic all the time?

The thing is, I believe two things.

First, asset bubbles cannot be prevented. They represent, in a very real sense, global stupidity about the future--and you can't fix stupid. The best we can do is thank goodness they're rare, and make sure that if one does crop up, the social institutions are strong enough so that we can those around us when things temporarily fall apart.

Second, it seems like everyone and their dog thinks asset bubbles can be predicted, managed, and ultimately prevented. Thing is, to solve the problem you need to find the source of the problem--and because there is no one source (other than global stupidity, which no-one ever wants to confess), eventually the fingers get pointed by partisans towards other partisans. That runs the danger that someone will actually act on those "problems" by creating "solutions" that screw things up even worse.

I would like to subscribe to your newsletter LOL. You are dead right on this topic.

'asset bubbles cannot be prevented'

So, that stretch in the U.S. between the 1930s till the end of the 1970s was just luck, totally unrelated to regulatory frameworks?

Well, one can be confident that the GMU econ dept would agree.

Interest in golf has been in long term decline, but the selling prices of Southern California golf courses have been rising due to Chinese white collar criminals looking for a place to park their loot where the CP can't get at it if the winds of favoritism shift.

The new equilibrium is sustained by the Fed's $4.4 trillion balance sheet, which includes $1.77 trillion in mortgage-backed securities. Of course, there were many other government interventions to put a floor under housing prices. It's more accurate to say that the government is committed to keeping air in the bubble.

Yes, this.

And as the Fed unloads those assets, interest rates will soar. The alternative is to hold a bloated balance sheet despite new bubbles, fuelling them even more. There is a lot of pain in their portfolio that they've been keeping from us. We will experience that pain eventually.

I don't think that's true. Basically, the Fed has swapped assets with banks, giving banks IOER for short-term deposits in exchange for the Fed assuming the long bond and mortgage portfolios. The Fed is operating like a classic banker, borrowing short and lending long, and they didn't need to print a lot of money to do this, so no inflation.

As markets regain their appetite for risk, the situation can unwind itself gradually. At some point, the Fed needs to end IOER, as it worsens the terms for the Fed/taxpayer. At that time, the Fed can print some money to finance its portfolio if reserves dry up, and maybe we'll get a little bit of the inflation everyone's been expecting but hasn't happened yet and wouldn't be the worst thing in the world.

And in the meantime, decent profits for the taxpayer/banker. Maybe a risky strategy, but not a crazy one.

Willitts didn't you just say above that "low interest rates will be the death of us"? So what's the problem with the Fed unloading those assets?

It should be obvious that both abnormally low AND abnormally high interest rates pose serious risks.

Maintaining artificially low interest rates will continue to fuel asset price bubbles.

But unwinding the Feds balance sheet is a complicated issue. In a one-security world, Fed sales would raise rates in a predictable and controllable manner.

But the Feds balance sheet contains a lot of toxic assets. Selling them will have a sudden, unpredictable and uncontrollable effect on interest rates. There, the issue is to land the plane instead of crashing it. Either way the market will equilibrate.

The Fed is unloading the assets in, as you say, a predictable and controllable manner, telegraphed well in advance, starting small and gradually rising, slowly. They aren't actually selling anything, just letting some things mature and not re-buying them. We won't see "abnormally high" interest rates.

'why land prices haven’t risen in Germany'

A couple of reasons are possible. First, 'extracting equity' by getting a new loan to reflect what the market considers an increased price is not allowed. Second, if you sell land any time before a ten year cut off, the profit is taxed. There is essentially no desire in Germany to have speculation be the basis for an economy, and no desire to emulate American models.

Though considering how strictly zoning is practiced in Germany, one would expect that the normal apologists for zoning equals artifical market demand would have a field day pointing out how Germany is just like SF or NYC or DC when it comes to exploding housing prices. Apart from that not being the case.

I think any complete answer needs to take into account the role German reunification played in housing costs and demographic changes.

Yep, that is a factor too, especially as Eastern Gemany, after re-unification, did experience something of a boom / bust (in major part due to tax incentives, and a profoundly optimistic view that Eastern Germany would 'bloom').

It's true that zoning doesn't cause housing prices to increase, people use zoning as the tool to cause pieces to increase. In Germany, zoning is used to keep prices down.

Neither of those "factors" appears to have much if any relevance to land prices

They are, however, seemingly effective in keep land speculation from running rampant.

Is land speculation a problem anywhere?

And home ownership is lower, and not seen culturally as necessary for a successful household.

Depends - the Schwabians would disagree vehemently with this point - but yes, there are various differences.


I think you are mistaken about the relative restrictiveness of zoning in Germany versus the Anglo world. In Germany, you have a "right to build" unless prohibited by a specific law. That is, officials don't have a discretionary power to reject a permit. In much of the US and Britain, officials do have discretionary power and often you have to have a hearing and prove that your project is good for existing members of the community. In lots of communities, most residents are owners, and of course it never suits their interests to have more housing. Many people in the US don't like density either, so they will oppose building even mid sized apartments near them. Furthermore I get the impression that Germans regard construction as a normal part of civilization, and Americans consider it an aberration, especially if it's near them.

The housing boom was a very mediocre thing in terms of the number of houses actually built: if you look at the FRED data for the number of housing completions, there's a gradual rise that is about the same as past peaks, followed by a complete collapse. I'm sure most of the building was *not* near SF and NYC, where residents can command higher incomes, either. Finally FRED's data on the number of homes in the US only goes back to 2000, but if you divide that by the number of households, the ratio is already lower than at the beginning of that data set.

As to the people complaining about low interest rates, they are a check on mercantilism. If they were raised there would be no manufacturing left in the United States, and construction would collapse and unemployment would skyrocket.

Just on the zoning point anecdotally my colleagues from Germany are always mystified when visiting the Bay Area how we can have such high housing prices yet so many single family homes.

If I had to guess the Swiss and Germans treat zoning like they treat everything else which is like and engineering problem. The logical answer there is to knock the single family homes down to build flats and this is unquestioned as logical land use

Zoning in the Bay Area is maybe more like a form of exclusionary collectivism? There is no health or safety issues I can see that should preclude allowing me to knock down my house and put up a two family.

Economic growth/prosperity is tied to rising asset prices (housing, stocks, etc.), both as a matter of policy and necessity at the current level of inequality. Indeed, post-Keynesians are very explicit about using rising asset prices to maintain economic growth/stability, some even promoting direct government intervention in equity markets to keep the good times going. When Congress refused to adopt fiscal stimulus after the initial round in 2009, the Fed resorted to extraordinary measures, including direct intervention in the bond markets, in order to fuel recovery. One might say we have become intoxicated with rising asset prices. Cowen should have dedicated his new book (The Complacent Class) to Tabarrok.

In other words, the rich shall not be allowed to become poor.

At high levels of inequality, conventional returns from investments become flat, inducing owners of capital to seek higher returns by taking more risk, investing in speculative (appreciating) assets rather conventional assets whose valued is based on the stream of income they generate. This eventually leads to a financial crisis, as investors lose confidence in the speculative assets, resulting in plummeting asset prices. One need only look at the financial crisis in 1929 and the financial crisis in 2008 for examples. The difference between 1929 and 2008 is that the government and the Fed intervened in 2008 to stop the collapse in asset prices and then resorted to extraordinary measure to inflate the prices of assets, whereas the government and Fed failed to intervene in 1929, resulting not only in a collapse of asset prices but the collapse in inequality as well (inequality fell because wealth was reflected in asset prices, which collapsed). I've commented many times that the beauty of markets is that they are self-correcting, and that includes self-correcting excessive inequality - provided the government and central bank don't intervene. Now one might prefer intervention if it means avoidance of a depression. But if intervention also means a continuation of excessive inequality, isn't there a continuing risk of another financial collapse, triggered by rising asset prices (i.e., speculation) that cannot be sustained indefinitely? Now one might argue that economists are brilliant and can navigate the economy so as to continue both economic growth/stability and rising asset prices and excessive inequality. One might make that argument. Of one might just redefine rising asset prices.

Agreed. I'll add a further complication. I believe spending changes are asymmetric with rises and falls in asset values. Spending rises slowly as asset values increase, but falls quickly as asset values decrease. Therefore, if the Central Bank wants to avoid recessions it is forced to allow asset values to greatly increase...but then quickly intervene when they fall. Thus you must keep pushing "wealth/gdp" higher.

I'm not saying bubbles don't exist, but "I see a bubble!" is a pretty hubristic comment to anyone who understands economics, and it's usually wrong.

It strikes me that the "this bubble is not a bubble" effort is at least as large.

And of course there is a reason for it. An entire economic philosophy was founded on free markets producing prices that were correct in every moment.

An anomaly, a price set by human, crowd, emotion is still viewed by many as an attack on their belief system.

So far here, today, on an economics blog, the pushback against bubbleology is made up of... me.

Saying "I see a bubble!" is basically saying "I see a mispricing in the market that all the people with skin in the game don't see." It's possible. It happens sometimes.

I think the mispricing can happen in either direction. By any standard of mispricing, the 2009 stock market was a yuge bubble, but it was a fear bubble, not a greed bubble.

I mean, this, from asdf: "Meanwhile, my friend in Boston just bought a house for way more then it was going for during the bubble."

What could this possibly mean? Is all of human history a bubble? I suppose that's one not very useful way of looking at it. Because I assure you, some day this shit is all gonna come crashing down. Mark my words.

OTOH, I'm always grateful for those rare opportunities when Keynesians and Austrians can make common cause and join arms around the campfire, quibbling about the precise characteristics of this or that bubble like a bunch of Medieval Scholastics.

For that story to make sense I suppose you would need to say that in 2008 there weren't owner-occupants willing to pay that price, only speculators and flippers, leading to a crash. Ten years later, in an different economic regime, are there owner-occupants to pay the price, with a low interest 30 year loan? To be really not-a-bubble I suppose those 2017 owner-occupants would need rational expectations about their own future income, needs, etc.

I was reading something from a California Real Estate training company. They claim that the cash buyers of 2009 and 2010 are dropping properties now, in expectation that higher interest rates will lower prices for a period starting in 2018. Anyone who was smart enough to buy coastal property in 2009 certainly profited from a belief in bubbles, crashes, and recoveries. Inland property remains iffy, probably because it isn't the scarce resource discussed by Karl Smith.

Speaking of coastal California, and scarcity. Two years ago this land was fully industrial, now ..


$800K seems like kind of a lot for a 2000 sf 4 story stack with no yard, but YMMV (Your expectations may vary)

"Two years ago this land was fully industrial, now .. $800K seems like kind of a lot for a 2000 sf 4 story stack with no yard"

California in a nutshell.

I'm with you. There's next to no ability for lay-people to predict bubbles. It's an extremely arrogant statement.

Those of us who had a 3 month old mini-puberty just can't help it.


Alex might not be comfortable with that link/joke, but the serious side of it is that we all have a hormone flooded "neurobehavior" and might might not always be tuned for optimal economic performance,

Well, given that a true asset bubble usually reflects widespread stupidity about the true value of that asset, saying "I see a bubble!" is sort of the equivalent of saying "everyone is stupid but me!"

Yes, I understand your conceit.

How much of this is the BANANA effect of "Buidling Absolutely Nothing Anywhere Near Anyone" and the increased restrictions on building?

From the graph above, it looks like Japan is the only country to avoid this phenomenon, and it also has the least restrictive planning controls.

It also has longtime economic stagnation and a falling population.

The effect in Japan may be overdetermined, but I do think there is something to the idea that supply constraints raise housing prices.

"longtime economic stagnation"

There has been a long running fake news story about that.

People compete for housing based on what they can borrow, not what they can afford.

If one is not a speculator, if one is a long term investor or buyer-for-use, I think the best course is to be bubble agnostic. By that I mean that the correct answer to is/was this a bubble is always "maybe?"

Or course, that does demonstrably leave some money on the table.

This is the same conclusion I have reached after a couple years of research on the issue. A big factor that isn't usually mentioned is migration. The areas we usually think of as "bubble" areas - inland California, Arizona, Nevada, Florida - were taking on massive flows of households leaving the high cost coastal cities where housing is limited. During the bubble, population was flat or falling in the coastal cities and rising sharply in the bubble cities. Too much for them to manage. That bubble happened entirely after the Fed had begun to raise rates. Here is my annotated time lapse chart on home prices:

Here is a post on Shiller ' s chart:

+1. Great stuff Kevin.

Great stuff, except for the fact that a bubble by definition impacts the short term, not the long term, something the "no such thing as a bubble" crowd ignores (Sumner, AlexT, Erdmann).

Erdmann's first link: "So, I don't think interest rates, per se, have much to do with these trends. Money supply and expectations seem more important." for the period 2000-2017 - OK, interest rates don't matter for non-Closed Cities (i.e. non-Coastal), but money supply does says Kevin, and expectations do. If in fact money is largely long term neutral, as most economists say, then 'expectations' is the only real variable for long-term real growth. So essentially Kevin is saying: "people are people, they buy where they hear others are buying, and sometimes this causes swings". Beannie Babies, aka why the latest fad toy is a boom-bust cycle. Thanks for the insight Erdmann. We eagerly await your next post, where it's shown two points make a line...

Erdmann's second link: discount the Shiller price index by a discount rate that's closer to modern "high-rent" times and it's less scary looking. OK, cool, largely a trivial point but it's cool.

Ray, if I may quote your favorite economist, "The long run is right now."


ctrl-f "Filipina" zero hits.

t was not the high-cost coastal cities people were leaving: it was the economically depressed Rust Belt and similar areas where jobs were vanishing. I was one of the migrants, moving from Ohio to Florida in early 2003 to take a job in St Pete, having lost my last "real" job in the tech bust almost two years earlier.

Migration out of e.g. California was high

Were they leaving LA, San Diego, and SanFran? Or the economically depressed inland areas? I'm betting it was the latter.

You would lose that bet.

Several million households have moved away from NYC, LA, SF, and Boston (on net) over the past 20 years or so - almost all of them households with less education and lower incomes than average. This migration was strongest in 2004-2006. They were flooding INTO inland CA, AZ, NV, and Florida.

The thing that makes your story typical isn't that you moved away from Ohio. It's that you didn't move to the urban NE or coastal CA, even though there were likely more lucrative options there. That's the 21st century American story.

Two points. First, the rise and crash in home prices wasn't evenly distributed geographically. There were small boom-busts in many locations, and massive boom-busts in others. Second, if a 12-year cycle in which prices rise 50% - averaged nationally - and then get entirely wiped out doesn't count as a bubble, what would? I don't mean that as a rhetorical point; I'm genuinely interested in what Prof. Tabarrok would consider a hypothetical bubble to look like.

In that case 2011 has to be in inverse bubble, right?

I'm always harping on this point, but never take the accuracy of published "real" prices for granted. As a libertarian ought to know, there is no such thing as a truly objective "real" price. The only objective price is the nominal price paid. All adjustments to that are subjective - even if they are rule-based, the way the rules are designed is subjective.

With housing there are two components that behave very differently: land and building. Buildings are usually worth close to replacement cost and those have to do with labor, permissions, materials. The rules for estimating "real" value are very simplistic and can't take into account changes in taste, eg the value of brownstones plummeting as they went out of style and skyrocketing back as they came back into fashion. Land is a completely different animal and is mostly what people are talking about re: bubble vs scarce resource vs cost of credit, all of which have truth to them. Statistical "real" prices of land are utter nonsense.

Apples to apples. Why is it people pay no attention to what actually occurred?

"Consider Fannie Mae's historical loan performance, reported each year by the Federal Housing Finance Agency in its Annual Report to Congress. Over a span of 37 years, from 1971 through 2007, Fannie's average annual loss rate on its mortgage book was about four basis points. Losses were disproportionately worse during the crisis years, 2008 through 2011, when Fannie's average annual loss rate was 52 basis points. Freddie Mac's results are comparable.

By way of contrast, during the 1991–2007 period, commercial banks' average annual loss rate on single family mortgages was about 15 basis points. During the 2008-2011 period, annual losses were 184 basis points.

Or check out the FHFA study that compares, on an apples-to-apples basis, GSEs loan originations with those for private label securitizations. The study segments loans four ways, by ARMs-versus-fixed-rate, as well as by vintage, by FICO score and by loan-to-value ratio. In almost every one of 1800 different comparisons covering years 2001 through 2008, GSE loan performance was exponentially better. On average, GSE fixed-rate loans performed four times better, and GSE ARMs performed five times better.

Mortgage analyst Laurie Goodman estimated that private label securitizations issued during 2005-2007 incurred a loss rate of 24%, whereas the GSE loss rate for 2005-2007 vintage loans was closer to 4%."


Yeah, the GSEs did it. If you ignore all of the facts.

Sorry, what is the relevance of your comment to your last sentence?

Umm, there is no financial crisis if all mortgages performed like the GSE mortgages performed.

Because housing is not portable, all housing markets are local.

In areas of high demand where new housing is limited by available land and/or restrictive land-use laws, housing prices rise sharply.

In areas that still have plenty of undeveloped land, even high demand produces only a moderate rise in prices (and then mostly because building becomes constrained by availability of skilled labor).

It is only in the first case where one might expect to see a bubble, as rising prices attract speculators, and as buyers commit whatever resources they can muster to buy before prices go even higher.

A market with constrained supply, durable goods and variable demand in which speculation is possible will be prone to boom and bust cycles; it may be modeled as a positive-feedback system in which rising prices induce new investment (thus producing further price rises) while falling prices may produce a rush for the exits (aka a financial panic).

Is there a profound message here, or just the reality that positive-feedback systems with plenty of gain are inherently unstable?

"Understanding why the equilibrium has changed is a fundamental issue that I don’t think we yet have a good handle on."

When everything else is so cheap you can spend more on your house.

BTW a chart of prices of comparable homes would be very interesting. I assume houses are getting bigger but in places like NYC and San Fransisco the prices for the same house have rising fast.

I thought the housing bubble was real at the time. Now I'm not sure, but that's mostly because I'm not sure my definition of a bubble is the same as everyone else's. I think it's obvious that during that time people and institutions were behaving in unexpected new ways that didn't seem rational or honest. Lenders abandoned basic credit and documentation requirements and coerced home appraisers to produce valuations that would let the mortgage sail through at the asking price. Investment banks levered up 80:1 and higher. Bond-rating agencies completely abdicated their responsibility. Individuals who had no previous real-estate experience started collecting properties with negative cash flow, purely for the expected appreciation.

So even if we can pore over data in hindsight and argue that there was no bubble, the world sure was acting as if there was a bubble at the time. If everybody is acting like there's a bubble, then I think that makes it a bubble.

Of course there was a housing bubble. That house asset prices are at these levels once again is just another indication where are beginning to head into bubble territory in some markets. It is not as bad as the previous bubble (yet?) because we don't have the chicanerous infrastructure supporting fraudulent loans or ridiculous types of loans. I also don't see everyone and their mother rushing to become real estate agents or mortgage loan paperwork writers, but that is probably because the internet's real estate infrastructure has developed enough that recent entry, poor quality people really have no market anymore.

However, I think some of this increase in asset prices is simply the harbinger of future inflation. Money supply has increased so much that the wealthy is just dumping it into assets (which is why we see stock prices as high as they are). Eventually we will see that begin to leak out into more basic commodities. I see this to a limited degree in things like the price of some grocery items are the same, but the packaging and quantity is now much smaller (cookies are a good example of this).

Chris, that is just capitalism. Without the debt based expansion, the system is defunct. It does not work. Libertarians are nothing more than another Jewish front that tells a dialectical story meant to expand debt and then contract debt. That ended up pretty bad in the past with long stagnations creating of course resistance. That is why socialism scares the jews and they try to control it as a "multi-cultural" force.

Always da jooz with you people. Bernie Sanders is pretty Jewish and he doesn't seem scared of socialism.

Not to mention Karl Marx was also Jewish.

What happened was the US economy got bailed out for free essentially and the actual contraction never happened to the strength it was going to occur(probably about 15% compares to a weak 4%) so prices refirmed. Obviously real prices would need to peak around 210 to get a similar bubble/construction boom, which is being made harder by Americans loving big, full equipped houses, rather than the "Spartan" houses of yesteryear. It takes more debt to move the needle.

Lets also remember the US economy grew at 3.5% between 1997-2007. 5% excess growth, which means the economy was still in overcapacity by the summer of 2009. The stupidity of idiots on the internet never cease to amaze me. There is no stagnation. Period. The debt market is recovering and building for its next run in the 20's and 30's which correlates to peak Generation Y spending.

Couldn't be argued that there is a link to trade deficit/surplus? The US has a trade deficit, which means Chinese demand for housing investment in the US, and increased demand means higher equilibrium prices. Germany has a trade surplus, which means such a mechanism is not at work.

I hope Alex T. reads this:


Nations with chronic current account trade deficits and tight property zoning see appreciating property values, continuously…even to the point most of the population can no longer afford to buy….

Two seminal studies in the Journal of Money, Credit and Banking:

“House Price Booms, Current Account Deficits, and Low Interest Rates,” by Andrea Ferrero, a version of which appeared in the Journal of Money, Credit and Banking, and which also has been presented as a study by the New York Fed. Ferrero concludes, “Yet, monetary policy factors play virtually no role for house prices and the current account.” Ferrero posits nations with large current account trade deficits face house-price booms.

As if that were not enough, another article from the Journal of Money Credit and Banking, entitled “Capital Inflows and the U.S. Housing Boom” Filipa Sa and Tomoasz Wieladek comes to the conclusion, “Our findings suggest that capital inflows that result from ‘saving-glut’ shocks have a positive and persistent effect on real house prices and real residential investment.”

The Housing Bubble of the last decade was the result of a long term bipartisan national strategy to help people in roughly the second quartile of income. Nobody could figure out how the working class could make more money, but lots of people had ideas about how they could borrow more money.

Thus, national policy was to boost homeownership from 64% to 70% through easier lending, such as cutting down payment requirements and turning a blind eye to faked income documentation from illegal aliens who work on a cash basis.

Part of this was to encourage lenders to loan more to minorities, such as by giving approval for mergers to ambitious bankers who promised to up minority lending, such as Kerry Killinger of Washington Mutual who won government approval for a couple of dozen acquisitions of other banks, in part by making optimistic pledges on minority lending.

You can't force lenders to lend to minorities if they think they will lose as much as WaMu wound up losing, but what the government can do is tilt the playing field in favor of bankers like Killinger who think more minority lending is a good bet. Skeptics about minority borrowers, in contrast, see which way the wind is blowing and re-orient their careers toward less policed fields like commercial real estate lending. Over time, this selects for lenders who are overly optimistic about minority borrowers.

When Bill Clinton was in office, Republicans somewhat restrained his urges in this direction. But when GW Bush came in and did the same thing, only more so, everybody went along it it. Interestingly, Bush apologized for his Ownership Society strategy in his memoir, but almost nobody noticed.

Not one single fact. Not one.

"The Housing Bubble of the last decade was the result of a long term bipartisan national strategy to help people in roughly the second quartile of income."

According to the Survey of Consumer Finance, there was no increase in homeownership in the bottom 2 income quintiles (going back to 1995). Most of the increase was in the top 2 income quintiles The relative income of homeowners during the boom did not decline.

It seems to be the case there's a general conflation of two propositions
1. There was a housing bubble
2. The housing bubble was "the" (only) cause of the crash

We can agree on 1. without having to agree on 2.

It's a little bit like asking, What set off American involvement in WWII?

If you answer, "Pearl Harbor," I can accuse you of simplistically ignoring Hitler and all these other factors that no doubt played a role. But still "Pearl Harbor" is a pretty good answer. And in fact Americans invested heavily in studying the mistakes of Pearl Harbor and in devising Early Warning Systems and the like that largely prevented Pearl Harbor like sneak attacks until 9/11.

Has anyone ever made one of those Schiller charts adjusted for the price of money e.g. Adjusted for interest rates?

Sorry, Tyler, but as one of the very few people who actually did call the crash of 08 almost to the moment, if what happened in US housing well befoe 2004 was not a bubble, then there is no such thing as a bubble. I do agree the fundamental has changed, and for the reasons you list.

As it is, you have simply left out the obvious measure of the fundamental, which has gone up. That would be rent. Those of us calling the housing bubble early, including especially Shiller, were looking at price to rent ratios, which went way up back then. This more recent price increase has gone along with rent increases, reflecting indeed those fundamentals you list, including lower real interest rates, supply restrictions in some locations, and so on.

BTW, I have read none of the comments here, but then, I doubt any of the other commenters here actually called what happened anywhere near what I did.

Try not to be so humble next time LOL

This time I swear to God this time it really is different this time this time it really is different it really really really is different this time!

What about the demand side?

Looking at the other half of the shiller graph, we see another irregularity: A prolonged dent. What happened there? Two world wars and a volatile world economy in the years between them. Maybe. But birth-rate growth or decline doesn't align much with the shiller graph.

Was it maybe today's most scorned upon invention: The mass-market car?

Yes you're onto something Alex FG: Kondratiev waves (business cycles), that last about 40-60 years, and occur due to technological obsolesce; when they crash there's a hard landing. They are hinted but not mentioned by name in Gjerstad & Smith, Monetary Policy and Housing Bubbles, Critical Review Vo. 21, No. 2-3 (2009, editor is, among other people, a certain Tyler Cowen) which argues that the standard narrative of Freidman et al that the Great Depression was a liquidity crisis is probably flawed, in that, like the Great Recession, it was probably a solvency crisis. Blame it on real estate speculation overloading the finance sector (same as in 2008, keep in mind a $3T crash in 2008 brought down the finance sector when a $10T crash in stocks in 2001 did not, since stocks are held largely outside the finance sector, by households), or, if you're a K-wave fan, blame it on demographics or transition from Horse/Steam to Automobile/Gasoline age, i.e., a supercycle.


Dateline August 1, 2017.

Did AlexT try and steal the Niskanen Center's thunder? Hmm... or is it Great Minds Think Alike? Or birds of a feather, flock together?

Eyes wide shut.

" Speculators had good reason to lie about intending to occupy a purchased property. Because owner-occupied houses had lower rates of default than investor-owned properties, lenders would give owner occupants an interest rate that could be as much as 40% lower than what they gave an investor. They would also require a smaller down payment as well as lower cash reserves. With stated income loans which did not require documentation of a borrower's income having become so widespread by 2005, the temptation of a speculator to lie on the application to obtain mortgages for one or more properties became irresistible.

The Prieston report claimed that based on its experience, as much as 10% of all mortgage applications involved fraud and that 25% of all foreclosures involved some kind of application misrepresentation. It turns out that these estimates may be much too low.

A previous REAL ESTATE CHANNEL article entitled Investors Played a Key Role in Creating Housing Bubble cited a 2009 Florida study which found that 44% of all foreclosures in Hillsborough County between 2007 and 2009 were on homes owned by investors who did not occupy their properties. An earlier 2005 study of that same county had reported that 40% of all homebuyers in 2004 did not apply for a homestead tax exemption because they admitted being non-occupant investors. If you add to this the large number of buyers who lied about being an owner-occupant to obtain the tax exemption, it seems clear that a majority of 2004 buyers in this county were speculators.

This egregious lying by speculators about intending to live in the property is illustrated by an article which appeared in the Arizona Republic in November 2005. It described a Phoenix attorney who was surprised to learn that nobody there was checking for mortgage fraud. So he did some checking on his own. A spot search of public records found large numbers of homeowners with two or more of their properties listed as owner-occupied. One property owner actually had fifteen of his houses listed as owner-occupied. Apparently no one else had ever looked into this or even cared.

The domination of the housing market by speculators in key bubble metros is also shown by an August 2005 study of house flipping put out by First American Core Logic. It found that in 2004, nearly 45% of all home sellers in the Las Vegas and Miami-Dade metro areas were flippers who had purchased the property within the previous two years. In Orange County, California, nearly 30% of all home sellers were similar flippers. In two zip codes of Las Vegas, 40% of these flippers had bought the property within the previous 12 months.

How much lying on applications was done by investors during the bubble years in hot markets such as California, Florida, Las Vegas, Chicago and Phoenix? An incredible amount. The comprehensive report on the nonprime mortgage market sent to Congress by the GAO in July 2009, which was referenced in a previous REAL ESTATE CHANNEL article, Terms of Endearment: How the Speculative Madness Was Financed, found that 92% of all subprime borrowers in 2004-2006 claimed that they were owner-occupants. Incredible! This was outright lying by millions of mortgage borrowers which was encouraged by lending institutions that were simply not interested in checking. "


Only the originator of the loans can hide these actions. Prevention of this fraud is as easy as it has ever been. All you need is a map and a credit report.

Exactly. Attributing a today's higher prices to housing improvements since 2000 is misplaced. If quality improvements are the motive force, what of all the many, many improvements of the 20th century that did not change real prices?

I would want to know how many transactions are covered in each time period. Fewer transactions with bigger prices can skew the numbers. Only people and investors with lots of cash, presumable high income people, bought the houses after 2008. Figures don't lie but... It wasn't prices so much as the leverage that supported the transactions that caused a problem.

I suspect that the 'new equilibrium' has a lot to do with Securitization. Move the assets off of the balance sheet, lend more, rinse, repeat... While this isn't new, it's much more common than it was in the 1980s.

Alex, I think you need to check the average for the 20th century. Shiller reports the data annually from 1890 through 1952. Starting in 1953 he reports the data monthly. It looks like you took an average over both annual and monthly data. You have effectively counted the values from 1953 through 1999 an additional 11 times per year. This is visible in the graph. Your line overstates the average. If you count 1953 through 1999 just once, the average is only 98.5.

Here is a link to the Shiller data, I added a sheet that converts the monthly data to annual average:

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