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.


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