Friday, Feb 15, 2008
This guy doesn't think so
Marginal Revolution: Was there a housing bubble?
Alex Tabarrok has created a lot of buzz with this post, arguing that because house prices have risen so much, it's not conceivable that they will drop back down to the long-term average. He argues that we are in for a reset to a new higher equilibrium for house prices, such as that which occurred after WWII.
There's been a huge reaction to the piece in the blogosphere (ugh, hate that term) with heavyweights such as Paul Krugman criticizing it, although noone has yet put forth a convincing counter-argument.
Well worth a read.
Posted by little professor @ 12:27 AM (982 views) Add Comment
14 Comments
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1. little professor said...
This is the graph in question. After WWII we reset to a higher average level of house prices.
Megan McArdle's analysis here:
http://meganmcardle.theatlantic.com/archives/2008/02/marginal_revolution_was_there.php
And Paul Krugman:
http://krugman.blogs.nytimes.com/2008/02/13/bubble-bubble/
2. new user 2007 said...
I have not got time yet to read these or the article.
I will add for now, however, that based on the chart, I do not agree with the comment that no one has or could come up with a convincing counter-argument...
If we look at prices before WW1 to the end of WW2, they were indeed an anomoly BUT the "step up" after WW2 was merely a return to the long term trend adjusting after the anomoly of two wars and a depression.
That chart in fact just supports the argument that the US is away from fundamentals going all the way back to a trend that is clear from 1890.
But from the summary given he actually also thinks they will face a correction, but with a small rise in the equilibrium level (via the smoothening business cycle and all that entails). If that is the case I agree.
3. new user 2007 said...
Ah, "it's not conceivable". I misread.
...the summary is not necessarily saying what I thought it was i.e. that they would fall back but by less...just as it was not conceivable for them to rise that much in the first place, but it happened...
the US created a rise in world potential GDP in the 1800s and China/ India are about to do the same so there will be some jump? Can't wait to read it.
4. hpwatcher said...
He is probably right, BUT only if the housing market is insulated from other effects i.e. recessions...which it isn't.
More headlines today about how families are unable to cope.
Expect a substantial drop in house prices.
5. quiet guy said...
"House prices have certainly stopped increasing and they have dropped but they have not dropped to anywhere near the historic average"
Well no but current property prices are in the process of dropping. I offer Dr. Housing Bubbles most recent article for anybody who doubts this:
http://www.doctorhousingbubble.com/southern-california-housing-numbers-exposed-the-bottom-falls-out-of-the-housing-market-again/
The Americans are nowhere near the bottom of their market and the full effect upon the American economy is still not clear.
IMHO, I cannot refute Tabarrok's argument either but that is mainly because it is so vague - not because it is so strong.
6. European-bear said...
One other point totally ignored...houses in the USA are much bugger than they used to be, have modern appliances, central heating, air conditiong etc. I expect if you adjusted the graph to price per square meter rather than actual price the overshoot would not look so great......
7. hpwatcher said...
Also, I think his definition of a bubble is wrong.
Prices don't deflate overnight, it takes many months & years.........
8. sacred contracts said...
I agree with hpwatcher - its going to take years.
The housing market has a whole lot of momentum and it takes a while to change direction and then build-up speed again. That's why last time there was a crash it got to the point when it was really, really hard to sell your house - even when offered at what would later seem like a bargain basement price...
Does anyone know of figures for the unsold? That's what interests me. How many houses over the years have come onto the market then left it again (or just sat there in the discard pile) without being sold.
All I've found are time-to-sell figures and those are the houses that have sold, they don't seem to take into account the huge number of houses, many perfectly sound as houses, that are just sitting there.
9. happyrenterz said...
That plot at the top of this page needs to be seen in the context of the plot below. Clearly the average wage must have increased a lot after WW2. It seems hard to imagine that happening now. But it DOES have to happen for house prices to stay at their current level. Or massive devaluation of the GBP.
10. Chilli said...
I don't see his point at all. He makes a point about not returning to original levels, but then suddenly jumps to the conclusion that there has been no housing bubble.
On the question of 'what has changed to precipitate this 'bubble'', here is my two cents.
Credit. It has until now supplemented incomes. I'm sure anyone who frequents this site is well aware of the debt levels in our society.
When the supply of credit ends, houses will drop in price.
The actual process will take a few months to years for each household as it takes people a long time to accept that they are bankrupt and settle things. I would not be surpised if the decent is more gradual than the ascent in this bubble.
11. Letthemfall said...
The Schiller plot scale is questionable. I don't know what data were used but that huge leap is misleading and needs adjustment for inflation or wage rises or both. What puzzles me about all this new paradigm stuff is where they think the money is going to come from to maintain these prices, especially now they are falling so fast in America. It would indeed be astonishing if such a transfer of wealth were maintained indefinitely.
12. 5lab said...
@happyrenterz
that graph is a little bias as its price vs disposable income - vs total income is surely better, as these days we obviously have more disposable than we did a couple of decades back??
13. happyrenterz said...
@ 5lab "Disposable income is gross income minus income tax on that income." so I think the plot is ok.
14. new user 2007 said...
I have read it....never has one man said so much and yet said nothing whatsoever.
Quiet guy sums it up. The only reason he cannot be argued with is that it he does not say anything at all.
The response from Megan gves him too much credit.
The one thing that she mentions is that mortgage access improved after WW2...that is grasping at straws on hi sbehalf at best, and at best opens the debate as to whether the exponential increase in debt that has been evident since 1997 (and that funded these increases) is sustainable. I think not, and the time bombs related to the magical process that allowed the debt to build up are now going off.