Why Is the Run-up in Housing Prices Not a Bubble?
There is no precedent for the nationwide run-up in home prices over the last eight years -- 35 percentage points in excess of inflation. Neither the great boom of the sixties, nor the demographic surge created by the baby boomers forming their own households in the seventies and eighties, led to any substantial increase in home prices, adjusting for overall inflation.
Economists who claim that that there is no housing bubble - that the run-up is explained by fundamentals - cite several factors:
1) increasing population due to immigration, 2) limited supplies of urban land 3) environmental restrictions on building 4) growing incomes of homebuyers
The problem with these explanations is that none of them are new to the bubble period - if these factors explain the current run-up in home prices, then they should have also led to rising real home prices in prior decades, when many of the factors (e.g. rising incomes) would have played a larger role in pushing up home prices. Furthermore, rental prices have not kept pace with home prices. The rate of inflation in rental prices is now slowing, and in some bubble areas (e.g. San Francisco and Seattle) rental prices are actually falling. No one has yet produced a remotely plausible explanation of how fundamental factors can lead to a run-up in home sale prices, but not in rental prices.
Bubbles inevitably burst, and the cost of the bursting of the housing bubble, like the cost of the bursting of the stock bubble, will be enormous. It will destroy much of the savings of tens of millions of families and almost certainly throw the economy into a second recession.
While it took nothing more than simple arithmetic to recognize the existence of the stock bubble in 1998-2000 [<http://www.cepr.net/stock market/stock_returns_for_dummies.htm>], virtually all of the nation's leading economists ignored the stock bubble. The nation's top policy makers designed economic policy as though the bubble did not exist and came up with implausible stories to explain the unprecedented surge in stock prices. [Footnote: Alan Greenspan actually testified to Congress in January of 2001 that he was concerned that the budget surpluses were too large and therefore a tax cut would be desirable to keep the national debt from being paid off too quickly. If these comments were sincere, then he must not have seen the imminent market crash and resulting recession.] This failure led millions to lose their retirement savings and was the immediate cause of the 2001 recession. They seem determined to repeat this mistake with the housing bubble.
This is your chance to show that the experts are right - that the economy does not face a dangerous housing bubble. Send your essay (absolute 750 word limit) on why there is no housing bubble to the Center for Economic and Policy Research (georges at cepr.net). The author of the most convincing essay will receive $1000. (The best essay will receive the prize, even if none of the entries are very persuasive). The winning essay will also be posted on the Center for Economic and Policy Research's website, along with a refutation of its argument. The deadline for the contest is March 31, 2004. The winning essay will posted on April 6, 2004.
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