Flashback 2005: Carl Steidtmann Called the Housing Bubble a Myth

From July 8, 2005—exactly three years ago today. Carl Steidtmann, chief economist at Deloitte Research, called the housing bubble a myth. Here are his wise words:

Everywhere you turn these days the buzz is about soaring real estate prices. If you are lucky enough to be a homeowner in one of the hot markets like South Florida or New York City, owning real estate is almost as good as winning the lottery. The increase in household wealth is seen by many analysts, who can’t stand the thought that someone somewhere might be doing well in this economy, as a sign of some future catastrophe to come. All the hype about a housing bubble is an excellent illustration of Benjamin Disraeli’s lament that there were 'liars, damned liars and statisticians.' While many of the housing price indexes that are published by both government and industry trade groups show prices spiraling higher, you really need to be a statistician to understand what they are saying.

When you strip away all of the white noise around a housing bubble, what you find is a robust market for housing that is undergoing several profound changes all of which manifest themselves in higher home price indexes, none of which adds up to a housing price bubble....

Everywhere the Boomers have gone, economic, political and social disruption has followed, and housing is no different. When the boomers were born, maternity wards were overwhelmed. When they went to school, there was a boom in school building that was not enough to keep a lot of public schools from going to a double session day. When the Boomers hit puberty we had a sexual revolution. At college age, they took to the streets in protest on a global level. Upon entering the workforce they produced record unemployment. When they first started buying houses in the late-1970s, housing prices soared. Even as we look ahead to their retirement, they will create a crisis in both private and public pensions. It should not be surprising that they are roiling the housing market.

As the children of the Boomers leave home, the housing needs of the Boomers are changing. They are moving back into the inner city to places like Harlem and at the same time buying second homes at record numbers. Both changes in housing demand are producing an upward movement in home price indexes. But do these changes really represent an increase in home prices that can be described as a bubble?

...The psychology of market participants in a bubble is also different from normal times. As a bubble reaches its peak the market participants are in search of the greater fool. Buyers buy only in the expectation that there is a greater fool out there who will pay a higher price. Eventually the greater fool is found and the price falls. As the market searches for the greater fool, the rising price brings out extra and sometimes unexpected sources of supply. It is this combination of increased supply and narrowing demand that results in the breaking of a market bubble and a fairly rapid descent in price. While there is some anecdotal evidence of market speculation, most participants are buying houses because they still represent a very good long term value....

Financial bubbles come to a crashing end when the sky high prices lure a wave of supply onto the market that crushes demand. Were housing a bubble, the high price of existing housing should be fostering a boom in home building. While new housing starts have risen steadily over the past couple of years, when adjusted for population, new home building is no where near the heights of building activity set back in the 1970s....

And finally, as interest rates have come down, the affordability of home ownership has gone up. Asset prices are high, but the actual cash flow cost of housing is near record lows due to low interest rates. The share of an average American household income going to finance a new median priced house today is lower then it was at any time in the past two decades. Interest rates are going to have to rise more than a little to increase the cash flow cost of housing back to the levels seen in previous decades....

And finally, as interest rates have come down, the affordability of home ownership has gone up. Asset prices are high, but the actual cash flow cost of housing is near record lows due to low interest rates. The share of an average American household income going to finance a new median priced house today is lower then it was at any time in the past two decades. Interest rates are going to have to rise more than a little to increase the cash flow cost of housing back to the levels seen in previous decades.

The summer of 2005—when he wrote the words above—was actually the peak of the housing bubble.

Congratulations, Carl Steidtmann! I hereby award you the James K. Glassman and Kevin A. Hassett Award for being completely unable to recognize an asset bubble. Keep up the good work and perhaps you can become a senior fellow at the American Enterprise Institute, too.