Econ prof: Was there really a housing bubble?

Just when you thought your respect for economics PhDs couldn’t get any lower,  a professor at the top-ranked University of Chicago, Casey Mulligan, is making the case in the New York Times that there was no bubble in housing:

Adjusted for inflation, residential property values were still higher at the end of 2009 than 10 years ago.  This fact raises the possibility that at least part of the housing boom was an efficient response to market fundamentals.

Inflation-adjusted housing prices and housing construction boomed from 2000 to 2006 and crashed thereafter.  Commentators ranging fromPresident Obama to Federal Reserve Chairman Ben S. Bernanke have described that cycle as a “bubble,” by which they mean that, at least in hindsight, the housing price boom was divorced from market fundamentals.

But maybe there was a good, rational reason for housing prices to increase over the last decade.

Let’s consider first what it means to believe that the spike in prices since the late 1990s was unwarranted — the so-called “bubble theory.”

According to the bubble theory, for a while the market was overcome with exuberance, meaning that people were paying much more for housing than changes in incomes, demographics, technology and other basic factors would suggest.

Now that the bubble is behind us, people today should be no more willing to pay to own a house than they were in the late 1990s. (It’s true that population has grown since the 1990s, but population growth is nothing new and should not by itself increase real housing prices.  Don’t forget that greater population also means more people available to do construction work.)

Yet, the professor points out, house prices are still well above 1990s levels:

Ok, so his basic point is that because housing prices haven’t yet declined to 1990s levels, there was no bubble. He doesn’t consider the obvious alternative: maybe prices don’t move in straight lines and that the sideways action in 2009 was the result of an $8000 tax credit and general upswing in market optimism (as seen in stocks and commodities).

Maybe, just maybe, as in Japan after 1989 and the US after 1929, housing prices will decline in a herky-jerky fashion for many years after the peak.

Mama, don’t let your babies grow up to be economists. They’ll never stay smart and they’re always confused.

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In other bizarre housing news via patrick.net, some real California estate foreclosure prevention scammers were tied up and tortured after they ripped off another team of real estate rip-off artists.

Key 2007 email sums up the mortgage situation. It’s not from Goldman.

Forget the middlemen – the real criminals are those who betray their oaths of office.

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Via the Motley Fool, here is an email from someone inside John Paulson’s hedge fund:

It is true that the market is not pricing the subprime RMBS [residential mortgage-backed securities] wipeout scenario. In my opinion this situation is due to the fact that rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while ‘real money’ investors have neither the analytical tools nor the institutional framework to take action before the losses that one could anticipate based [on] the ‘news’ available everywhere are actually realized.

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This guy was on the right track. Incentives are everything when you’re looking for explanations. The only things this guy left out were the role of government and the fact that managers did have the tools (google, for one) to figure out that there was a housing bubble.
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Government provided low-interest credit through Fannie and Freddie, which passed off much of the risk here to the taxpayer through their implied (later realized) guarantee. There was also the tremendous moral hazard of “too-big-to-fail,” which was always just a cover story to justify whatever taxpayer theivery the banks wanted to undertake. FDIC is also another massive risk-transfer scheme that encourages reckless lending by both bankers and depositors.
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Also key is the fact that the incompetent rating agencies, Moody’s, S&P and Fitch, only got that way after the government made them a cartel and removed market forces from their industry. If all rating agencies were paid by investors (rather than issuers) and had to compete on the basis of their performance, like Egan Jones, they would actually do some analysis.
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Goldman is a scapegoat. In the final analysis, they may be untrustworthy (who didn’t know that anyway), but they are just middlemen, and they didn’t force anyone to buy their bonds. They didn’t create the demand for junk credit — interest rates and spreads were very low during the bubble years, and huge institutional buyers with very highly paid managers simply failed to do their job of understanding what they were buying. Without their demand for junk mortgages, there could be no giant bubble. In the case of public pension funds like Calpers, this demand was partly the result of unrealistic promises made to unions which required very high annualized rates of return.
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For anyone who had read any economic history, the situation was plain as day (houses were selling for record multiples of incomes and rent, prices were way above trendline, credit was ridiculously easy, and speculation was rampant). If I saw it as a 20-something kid using google, how could the big shots miss it? The reasons are similar those in any mania, with heavy doses of moral hazard, group-think and extreme optimism. It’s all clear in retrospect, but back then only the weirdos, historians and Austrians were removed enough from the zeitgeist to see it.
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If you want to single out firms and individuals for retribution, look at those who betrayed their oaths of public service during the bubble and the Heist of ’08: Tim Geithner, Hank Paulson, Ben Bernanke, Alan Greenspan, Chris Dodd, Barnie Frank, Nancy Pelosi, Chris Cox, etc. Forget the middlemen – these are the real criminals, the people who lie into cameras for a living and deploy force against the citizenry (as a taxpayer you are forced under threat of imprisonment to absorb the losses on bad mortgages you neither bought nor created).
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The bankers can buy this power, but only because it’s for sale. Bankers don’t even have to violate the law to lock savers into their paper money cartel and pass off risks to the taxpayer — their lackeys have fixed it all for them.

Australian columnist: maybe our housing bubble is not a good thing.

From the National Times:

WHEN house prices soar, you can hear the silent cheering all around you. Most of us own homes, so rising prices increase our notional wealth. They mean someone else will have to pay us more in future to buy our homes.

Market analysts and the media bombard us with data on what are the ”best-performing suburbs” – meaning the suburbs where prices rose most. They see it as self-evident that rising prices are a good thing – and the higher, the better for us.

Well, sorry, but they’re wrong. Rising prices may be good for those of us who own homes – but far less than we assume. And they are not good for ”us” as a society.

Let’s be blunt. No social change in recent times has done more to make younger Australians worse off than the waves of house price rises since late 1987, when Labor restored the tax break for negative gearing.

Since September 1987, the Bureau of Statistics tells us, average house prices in capital cities have risen by 433 per cent. In other words, a typical house that was an affordable $100,000 in September 1987 cost $533,000 by December 2009.

But haven’t incomes risen too? Yes, they have: but by only 195 per cent. So if a typical household had a disposable income of $30,000 in September 1987, it has risen to $88,500 now. (There are no figures for median household disposable incomes, but these are in the right ball park). The cost of a typical home, in this example, used to be 3.33 years’ disposable income. But now it costs six years’ income…

…Rising prices are inflation. We don’t think higher petrol prices or higher fruit prices are a good idea, although they certainly make someone better off. Why do we think inflation is such a good thing when it applies to owning a home?

This is one area of policy where government intervention has made things worse for the group they say they want to help: aspiring home owners. That is clear from the sharp fall in home ownership among younger age groups (indeed, among all age groups under 55). (cont…)

The author makes some good points, such as calling asset prices inflation (they are indeed a symptom of inflation, an expansion of money and credit), but he doesn’t seem to get that prices can form bubbles and crash without any changes to the tax code or the traditional supply/demand curve. What matters is cheap credit made available by the moral hazard extended to banks by the existence of a central bank and its ability and willingness to print gobs of money and bail them out.

Break up the cartel and allow a free banking system, and bubbles would be localized and contained by bank runs and the mere risk of bank runs. Bankers need the “fear of God” as on old-time chairman New York’s Chemical Bank put it when asked how he managed to redeem his notes in gold and silver through panics that sank so many others.

The bubble down under

5-year view of the ASX 200:

Source: Bloomberg

Australia has a huge property bubble that has yet to burst. The average home there, at AU$502,492, is priced at eight times average household income, compared to about three times income at the height of the US bubble (though higher in places like California and Florida). This is a country with a population density of just 7.3 per square mile, compared to 83 for the US!

Aussies are still in the denial stage, which says a lot about the nature of group-think, since they can look at the rest of the world and see the exact same dynamic at play, though a couple of years ahead.

China appears to be in about the same place, with prices even more out of whack with incomes and rents, twice as overvalued as the most overvalued California houses in some cases. Australia and China also have plenty of froth in their equity markets, though those resemble the US and the rest of the world.

What would happen to Australia if housing prices, stock prices and commodity prices all collapsed at once? Come to think of it, Canada is in a very similar position, and their housing bubble, while not as wild, has still yet to deflate.