April 19, 2005
House prices: bubble or not?
I don’t have the answer, but here are some clues.
A recent paper by Edward Glaeser and Raven Saks, of Harvard University, and Joseph Gyourko, of the University of Pennsylvania, concludes that stiffer zoning laws and other regulations have forced up the cost of building large-scale developments. They also note that existing home owners have become more adept at organizing themselves to prevent new construction, raising prices still further.
By themselves, such developments don’t make a bubble. However, there are other factors that make the housing market more susceptible to bubbles than, say, the stock market.
For one thing, there is no real futures market in property, which means no short-sellers to moderate prices if they rise above their equilibrium level.
Additionally, housing is a badly flawed market—every home is different, price benchmarks are hard to find, rationality is in shorter supply than Tribeca lofts. So buyers rely on shakily calculated trends or even rumors, which tends to push prices still higher.
And then there are the banks. When house prices are rising, they will always lend as much as possible in order to increase the value of their collateral. The flip side is that when prices do eventually fall, the banks run for cover, creating an even bigger bust.
Of course, none of this means we are in a bubble market, but…
Thanks to Marginal Revolution for highlighting the paper.
Posted by Stephen at 4:14 PM in Economics | Permalink | Comments (1) | TrackBack (2)
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» Bubblelicious from Asymmetrical Information
Is the American economy experiencing a housing bubble? Damn straight. And it looks like the party might be coming to an end. Update Stephen Ayers has more. One quibble: he says that there's no short market for real estate. But in a way, renters are imp... [Read More]
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» Housing bubble? from Rant+Rave
Tyler Cowen at Marginal Revolution and Jane Galt at Asymmetrical Information have had recent posts on whether there's a housing bubble in the US, partly in reference to an article in _The Economist_ predicting the collapse of the bubble. I too may be d... [Read More]
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Comments
It sounds to me like there are quite a lot of posters who did not get into the market when "they should have", want to get into it now but can't afford it, or can afford it and want to get into it but are emotionally impaired by their own fears, and have selectively collected "data" (better stated, opinions and predictions by academics) to justify the fact that they may still be renting or sitting it out. Perhaps the source of the emotional element of this market is the assumption that markets operate on rationality. I also think that economic indicators are just that. They can be used as data to make probabilistic predictions, but reality and history operate under very complex sets of intersecting laws, unforseen events, and their unexpected consequences. The debate over a "bubble" is great currency to keep academics, the media, and scholarly journals alive. In my opinion, its value to anticipating the future isn't too much more than that.
Posted by: Sociologo at May 13, 2005 11:40 PM
