Sunday, November 30, 2008

Flashback 2004: Art Laffer denies the housing bubble

Exactly four years ago today, Art Laffer, one of the founders of the quack economic theory of supply-side economics, denied the existence of the housing bubble:
The price of housing is one of those topics that grabs just about everyone’s attention. In fact, if it hadn’t been for the presidential election squeezing other topics of interest off center stage in recent months, there would have been a lot more focus on what’s been happening with the housing market. Yet, in spite of the near monopoly of politics on the media’s attention span, there still have been quite a few reports and news articles covering the virtually unabated rise in housing prices. And these stories—some of which border at times on panic—almost all invoke the word “bubble.”

A closer investigation of these alarming reports reveals that many are unsubstantiated or based on logic that is faulty. Bubbles very well may “carry the seeds of their own destruction,” but from our standpoint there is no bubble. When viewed properly, the data do not show housing to be overpriced.


  1. Look at how technology companies made up close to 35% of the S&P 500 capitalization back early 2000. Look at how the median house was 5 times annual household income back in early 2006. Look at the S&P 500 P/E ratio from 2000 to 2006. Look at the average dividend yield for the S&P 500 in the 1950's to 1970's to the 1980's to present day.

    Look at the fundamentals now.

    There are still many areas to be affected such as the San Francisco area housing market.

  2. One of us should take it upon ourselves to attempt to contact these famous bubble deniers of yore. I'd love to hear their newest pseudo-intellectual babble on why the sky isn't obviously blue.

  3. Yeah, Lance tell us how you were wrong. I know your there, and i'm still here too

  4. I particularly like the part where Laffer says one shouldn't compare the income from an asset to its price when determining whether the price is reasonable.

    I'll sum up his entire hogwash argument: because monthly payments were super low (due to negative amortization, pick a pay, no doc loans which are conveniently not mentioned as being the sole reason for such super low payments) and people could "afford" them, there can't be a house price bubble.

    Of course this completely ignores the unsustainability of the mortgage products being used or the abnorally low rates, and ignores the fact that temporary affordability doesn't = prices are good. Maybe he doesn't realize a car dealer can fit any monthly payment you desire so long as the term is stretched out far enough.

    I can't believe people with such idiotic views are paid money for them.