Shostack + Friends Blog Archive


Housing Bubble?

Tyler Cowen asks, does DC have a housing bubble, and asks how can we justify the price rise:

Housing can be lived in, most buyers have only one home, transaction costs are relatively high, and rarely are homes sold and resold in a matter of days. All those features militate against a housing bubble. Yet it is scary to see how high prices have risen in the Washington D.C. area. Prices in my overall region are up 73 percent in the last four years, can houses be worth so much more? Plus rent-buy ratios have reached apparently unsustainble levels, inconsistent with traditional assumptions about discount rates.

I’ll offer up a reason #5 for his list: You believe that the government grows at the drop of a hat, and shrinks only as a result of heroic effort. The ‘compassionate conservative movement’ is about using the government to achieve goals, not to create a level playing field. If these are true, we can expect government to grow for at least the next 3-4 years, creating increased demand, and driving prices upwards.

I hear people all over talking about houses as investments; believing that they can’t ‘really’ lose money, that the tax break for mortgages makes anything you can finance a good deal. Anecdotes are not evidence, but when I look for evidence against the idea that there’s a national housing bubble, it’s in short supply.

[Update: Forgot to link to the article. Sorry!]

3 comments on "Housing Bubble?"

  • petrilli says:

    There is also the increasing use of interest only, or even in some cases, less than interest-only, loans to pay for these houses. This sort of speculation is nearly identical to the buying on margin that was done in the late 90s, and led to the loss of huge sums of money.
    I believe the mousing market is overheated because of the bizarre constructs people have to use financially.

  • Cypherpunk says:

    A bubble is a product of speculation. People pay the price for the product only in the belief that the price will continue to rise. If they thought the price was simply going to stay the same, they would not buy it.
    Housing markets are vulnerable to some extent to these bubbles. A good indicator is housing “flips”, where someone buys a house only to sell it a few months later, perhaps after a quick and superficial remodel. When these activities are driving housing prices, the market is unstable and can enter a bubble.
    But generally housing is driven by people who simply want a roof over their heads. They will pay no more than they have to and have no intention of profiting from a quick sale. As long as these are the major considerations in the market, housing prices are justified.
    Which is not to say that they can’t fall, but that would be due to a decrease in the demand for housing, or a general economic failure which takes money out of everyone’s pockets. Absent these factors, prices will stop rising at some point and everyone will be happy, because they didn’t condition their housing purchase on the expectation of continued steep increases in price.

  • triticale says:

    As noted, a bubble is a consequence of speculation. In today’s market, condos are still being built speculatively, but single family homes are far more likely than in previous markets to be built to order. Thus a downturn will not result in a sudden glut which needs to be sold. To the extent that there may be a bubble, I would expect it to deflate gently rather than burst.

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