No Housing Bubble Trouble (2005)

http://www.cato.org/publications/commentary/no-housing-bubble-trouble

by jwallaceparker • 13 years ago

70 30 13 years ago

natmaster• 13 years ago

I am curious how an advocate of Keysian economics is a fellow at an institution that heralds itself as being "...dedicated to the principles of individual liberty, limited government, free markets and peace."

nhashem• 13 years ago

Keynesian economics is mostly just based on the idea that consumer demand drives the economy ("aggregate demand"). This demand usually is discussed in terms of consumer spending, but this is frequently misrepresented by strawmen such as "Keynesians just thinks reckless spending is the solution to everything" or "Keynesians think the way to get out of debt is more debt."

This is false. For example, it's not contradictory to believe in Keynesian fundamentals and supply-side economics, if you think tax cuts would indeed stimulate private spending to the point of increased tax revenue (which actually did happen when marginal tax rates were cut from 91% to 70% as was done in 1964[0]). You can also be a Keynesian and believe in a balanced budget, if you think deficits are causing inflation that the Fed needs to keep interest rates high to fight, and thus those high interest rates are suppressing private sector economic activity (as was true in the 1990s[1]).

The Great Recession has caused the bizarre circumstance of a liquidity trap[2] -- simply lowering interest rates isn't stimulating economic activity, and inflation is low. The Keynesian prescriptions for this are unconventional monetary policy (the Fed's "quantitative easing," which can be done because there's little risk of inflation) and government fiscal deficits (to make up for the lack of consumer demand). Somehow this gets warped into thinking that people like Ben Bernanke and Paul Krugman think you can solve any economic problem by printing dollars and/or getting into more debt.

[0] http://en.wikipedia.org/wiki/Revenue_Act_of_1964

[1] http://www.washingtonpost.com/blogs/wonkblog/wp/2012/08/06/w...

[2] http://en.wikipedia.org/wiki/Liquidity_trap

adventured• 13 years ago

The notion that inflation is low is a lie. The CPI was substantially altered in the early 1990s to mask the huge increases in prices that have gone on.

Housing is skyrocketing again right now, fueled by a massive inflation binge the likes of which the planet has never seen before. The cheap money is flowing into assets (stocks, real estate), as the Fed said it intentionally wanted to have happen.

Nationally housing values are now climbing at a 10%+ annual clip again (20% in Phoenix, with markets like DC at all time highs), driven by the Fed's inflationary posture of QE + hyper low interest rates. That equates to trillions of dollars worth of asset inflation annually. Housing is one of the most important inflation metrics, and it's going up massively right now.

It's not the economy rebounding causing it. How do I know? Well beyond the obvious QE + low mortgage rates + lack of job creation, we're creating almost zero construction jobs right now (compare that to the last two times housing prices soared).

Stocks have been juiced (inflated) by the easy money policies, leading to an S&P that now has a higher PE ratio than the last bubble. And given that S&P earnings are now eroding backwards, said PE ratio will probably continue to expand beyond that.

College costs? Massive inflation. College costs doubled in ten years against the backdrop of the great recession. Welcome to government inflation.

Healthcare costs? Massive inflation.

Food prices? Near all time highs.

Energy costs? $90 oil, $3.60 gasoline. Both are prices that would have been considered beyond outrageous just 10 or 12 years ago. Now that's the new normal. Meanwhile the US is producing more oil than at any time in the last 30 years, so it's not a supply problem (it's easy to see that by comparing the available supply of oil and gasoline against 2003 numbers). Our gasoline usage is back to 2002x levels, but prices are up 175% or so.

Home prices are up 75% to 150% in most major markets over 15 years. Given incomes aren't soaring, and we have 14.x% real unemployment, that's a dramatic increase.

Even with gold's sizable pullback with the climb of the dollar in the last few months, at $1400+, it's also a price that would have been considered impossible just ten years ago. Ditto silver (up 500% in 10 years) or platinum.

Everything screams: inflation wave.

brc2• 13 years ago

What you post is true. Not all followers of Keynes are believers are money-printing stimulators.

But the reverse is not the case.

Just about all money-printing 'stimulators' like to throw Keynes around as justification for doing so, no matter how far away it is from the original theme.

The basic tenet of running surpluses to fund deficit spending in years where confidence has dipped isn't all bad. But there are plenty of people who endlessly bang the 'spend spend spend' drum and justify it by pointing at Keynes.

kislayverma3• 13 years ago

I love these time-capsule style re-posts.

wladimir• 13 years ago

Me too. It's one of the only ways of keeping people that make long-term predictions accountable. Usually, no one calls them out if they were wrong, they only get the attention and praise if they were right.

kislayverma3• 13 years ago

True. I think if we analyzed the predictions of so called 'experts' before and after the fact of any event, the result would be extremely embarrassing.

But then, we should already know that.

olympus• 13 years ago

I don't think the author was wrong (which seems to be the underlying implication of this article popping up seven years later). Sure, the housing bubble burst, but that was over a year after he wrote this article. A lot can change with the economy in a year, and obviously not everyone in 2005 thought that housing prices would fall. Indeed, if the majority of people in 2005 had thought that prices were going to fall then prices would have peaked in 2005 instead of 2006. If you look back after every downturn you will always find people who were bearish and you'll call them smart. You'll also find bulls like this guy and you'll call them dumb. But maybe it's more about being lucky or unlucky.

chime• 13 years ago

I remember writing about the bubble in my blog back in 2005 ( http://chir.ag/200510301225 ). Though I wrote that 9 months after this article was published, nothing really had changed - prices were still rising, home sales were strong, everyone had equity. I had been monitoring the housing market since early 2004 and saw tons of articles on both sides of the argument.

I bought a house in June 2005, being fully aware that there is a big chance the bubble could pop. As a result, even though I could've gotten a bigger house or taken out a home equity loan, I bought the smallest house I could be comfortable in for 5+ years and did not take out any loans. Meanwhile my coworkers who were also in my salary range bought houses 25-50% more expensive.

From the article:

> That would be unpleasant news for home sellers, but good news for buyers. And what sellers lose when selling one house they often save when buying another. Any risk of loan defaults would be negligible.

When a lot of sellers lose, it brings down the market.

> At the national level, what could possibly kick national home prices downstairs? There is nothing to suggest massive job loss ahead or a huge oversupply of new homes.

When there are a lot of sellers and too few buyers, there is a huge oversupply of homes (new and old).

You're right that nobody can tell the truth about future. E.g. who knows if 1 bitcoin is going to be worth $100, $1, or $1,000,000 some day. However, the author was clearly ignoring the signs that worried a lot of people, including myself.

meric• 13 years ago

Good on you! Your first house is a only a hedge, no point paying more insurance than you need to. There is no advantage to property price rises if you only own one house, therefore, there is no point buying a house bigger than you need, if you plan to live in it for the long term.

saosebastiao• 13 years ago

Well that is embarrassing.

angersock• 13 years ago

Perhaps the money shot for the article:

  In short, we are asked to worry about something that has 
  never happened for reasons still to be coherently 
  explained. “Housing bubble” worrywarts have long been 
  hopelessly confused. It would have been financially 
  foolhardy to listen to them in 2002. It still is.

anigbrowl2• 13 years ago

I found that especially hilarious having been through a painful housing bubble-pop in the UK in the early 90s.

calhoun137• 13 years ago

This reminds me of this you tube video, called "Peter Schiff Was Right": http://www.youtube.com/watch?v=2I0QN-FYkpw

It's basically a bunch of people screaming at Peter Schiff that he has no idea what he is talking about, when he was basically predicting everything that happened. Apparently Peter Schiff is pretty smart, I watched a bunch of these videos and listened to his radio show. He is now predicting a massive drop in the dollar due to inflation.

anigbrowl2• 13 years ago

Wow. It's like watching one normal person and a bunch of other people smoking crack.

cpursley• 13 years ago

I send people to this video all the time.

toomuchtodo• 13 years ago

Is there any way to profit or take advantage of a drop in the dollar besides forex trading?

joshAg• 13 years ago

buy a bunch of stuff (eg: gold oil, water, food, cars) now on credit and sell it for more than you borrowed after the dollar's value tanks?

codeulike• 13 years ago

Would have been more prescient/anti-prescient if it discussed CDCs and the Rating Agencies in some way. At any point in time there are people shouting "bubble" and "no bubble" about anything. How close people got to figuring out the underlying mechanisms of the 2008 economy-blue-screen-of-death is more interesting.

(Yes, the economy blue-screened, we re-booted in safe mode but we're still not sure if we've fixed the drivers yet)

nkoren• 13 years ago

Compare to The Economist's take, at roughly the same time:

"The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops"

http://www.economist.com/node/4079027?story_id=4079027

That article was instrumental in convincing me to quit being an architect in 2007, since it was obvious that a real estate crash would bode ill for that profession.

When it comes to economic advice, I won't be taking any from the Cato Institute.

No Housing Bubble Trouble (2005)

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