For the bubbleheads, overshooting is a thing to be embraced. After all these years of being priced out of the housing market, they say, we will finally be able to buy houses for pennies on the dollar. For the economists, overshooting is a thing to be feared because it would prolong and deepen the recession.
I would love it if housing would overshoot. Who wouldn't want to buy a dollar's worth of house for 50¢? However, predictions should be based, not on hope or fear, but on historical data. Those who predict overshooting do not have history on their side.
The two most prominent examples of previous housing bubbles come from Japan and Los Angeles in the late 1980s and early 1990s. Here is Japan. Notice no overshooting:
Here is Los Angeles. Notice inflation-adjusted prices fell right back down to where they were in 1987, with no overshooting. Nominal prices never fell back to their 1987 level:
People who predict overshooting—especially the professional economists—have a responsibility to back up their predictions with actual historical data. Martin Feldstein, especially, has been using a baseless fear of overshooting as an excuse to justify propping up the bubble.
I challenge people who believe in overshooting to back up their belief with actual historical data. It is certainly possible that housing will overshoot—Las Vegas and Phoenix are looking like they will—but in most parts of this country, it is far from probable.
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