Contrary to the assertions of many economists and others, the boom and bust in housing over the last decade was not primarily caused by low interest rates, reduced downpayment requirements, or laxer underwriting standards, conclude Edward Glaeser, Joshua Gottlieb, and Joseph Gyourko in “Did Credit Market Policies Cause the Housing Bubble?” a new Policy Brief...You might want to take what these economists say with a grain of salt. Edward Glaeser is associated with Harvard's Joint Center for Housing Studies, which routinely denied the existence of the housing bubble until it burst, although to be fair, his name never appeared on any of the annual studies that denied the bubble's existence. It does suggest, however, that Harvard economists are not the cracker-jack financial wizzes that they are supposed to be.
“It isn’t that low interest rates don’t boost housing prices. They do,” write Glaeser, a professor of economics who directs the Rappaport Institute and the Taubman Center, and his colleagues, Joshua Gottlieb, a doctoral student in economics at Harvard; and Joseph Gyourko, a professor of real estate at the Wharton School.
“It isn’t that higher mortgage approval rates aren’t associated with rising home values. They are,” they add. “But the impact of these variables, as predicted by economic theory and as estimated empirically over many years, is too small to explain much of the housing market event that we have just experienced.” Specifically, the authors found that the 1.3 percentage point drop in real interest rates between 2000 and 2006 was responsible for only a 10 percent rise in prices, about a third of the average price increases nationally during that time...
Glaeser, Gottlieb and Gyourko did find that the price effect of interest rates was greatest in metropolitan areas such as Boston, San Francisco, New York, and Seattle that have less land, more regulation and/or topography that is not conducive to new buildings. However, that impact was not enough to explain the full magnitude of the housing bubble in those places. ...
The authors also found that contrary to the assertions of many analysts, including Benjamin Bernanke, chairman of the Board of Governors of the Federal Reserve System, reduced downpayment requirements did not greatly contribute to the housing bubble. Rather, they found that on average the share of the purchase price covered by a mortgage was basically unchanged over the course of the boom...
CNBC's Diana Olick has more on this study.
I have long believed that fundamental factors spark all bubbles, but then a get rich-quick-mentality takes over in the minds of buyers as they watch asset prices rise. As they buy up assets in a quest to chase the market, this increased demand pushes prices up even more, which then convinces more people that they can get rich quick by jumping in. Thus a feedback loop develops where the get-rich-quick mentality becomes a self-fulfilling prophecy, until something finally breaks the cycle. Then the cycle reverses itself.
I believe this is how all bubbles happen, not just housing bubbles. However, I have been attacked by many Bubble Meter readers for this belief that buyers largely have themselves to blame for the bubble. Despite the fact that bidding wars often broke out during the bubble, in which buyers frequently bid above the asking price of the house, it is far easier for people to lay all the blame on a small group of Wall Street bankers than spread the blame over a large swath of the American public.
If Glaeser et al's study is correct, it doesn't mean that credit market policies are blameless for the bubble. However, the major factor in the growth of the bubble, which they were unable to identify, could easily be the get-rich-quick feedback loop. This type of short-term irrationality is something that traditional economic theory does not recognize. Economic man, after all, is purely rational.
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Given the level of control and manipulation within the corporate realm of banks (IMF, World Bank, BIS) over all governments worldwide, I am amazed that none of these "professional" analysts have explored the possibility of intentional manipulation for a political goal. The US is home to, afterall, the most corrupt corporate plutocracy in the world due to its level of power. An analyst who doesn't look to the obvious first is a paid-for analyst, IMO.
ReplyDelete"reduced downpayment requirements did not greatly contribute to the housing bubble."
ReplyDeleteBut reduced downpayments or no downpayments are certainly contributing to the current foreclosure problems.
Increasing the supply of buyers by (1) reducing the required down payment; (2) making adjustable rate mortgages available and then the norm, with qualification at introductory rates; (3) permitting people who can't or won't document their income to borrow as if they could and did -- all these are bound to drive up prices in the absence of increases of supply of housing. In California, where homeownership rates are among the lowest in the US, Proposition 13's grandfathering of long-time owners in minuscule property taxes also served to reduce the supply of housing in the market; normal ages-and-stages simply do not apply there. (Their overall homeownership is 4th lowest in the US, but their seniors have homeownership rates higher than their counterparts in the remaining 88% of the US!)
ReplyDeleteAlso, wealthy buyers/"investors" from other countries, and increasing population tend to drive up the prices.
Adding a few more buyers without increasing the supply of housing will produce the bubble effect.
Reporting what's going on at the median isn't the important part of the story. Conditions which add a few more first-time buyers to the market increase the down-payments which move-up buyers can make from bubble-created equity on their first houses. And the bubble runup is off and running.
I've heard it said that neoclassical economists are rich people's useful idiots. This study appears to provide support to that argument; I look forward to reading the paper itself when they put it online.
Readers of this site might be interested in several pieces written by Mason Gaffney, including "The Great Crash of 2008" at http://www.masongaffney.org/essays/Great_Crash_of_2008.pdf, at "How to Thaw Credit, Now and Forever" at http://www.masongaffney.org/essays/How_to_Thaw_Credit.pdf.
ReplyDeleteAnd, if preventing the next cycle is of interest, you might be interested in "After the Crash: Designing a Depression-Free Economy." A related interview is at http://www.masongaffney.org/essays/GAffney_interview_in_Canada_Sun_Life_Financial.pdf
In 1933, a Chicago (!) PhD student, Homer Hoyt, published his thesis, entitled "100 Years of Land Values in Chicago." It remains relevant today. See http://www.wealthandwant.com/themes/Hoyt.html and http://www.wealthandwant.com/themes/Boom_Bust_Cycles.html
I think its obvious that the "cause" of the bubble was buyers' bubble mentality and greed. But the other factors which the study addresses, in particular lax underwriting standards, were necessary pre-conditions. People will always be greedy, illogical and prone to inflate asset bubbles of one type or another. The key to economic stability is sensible regulation.
ReplyDeletekahner said...
ReplyDelete"I think its obvious that the 'cause' of the bubble was buyers' bubble mentality and greed. But the other factors which the study addresses, in particular lax underwriting standards, were necessary pre-conditions. People will always be greedy, illogical and prone to inflate asset bubbles of one type or another. The key to economic stability is sensible regulation."
That I agree with. However, I believe that while some of the things being blamed for causing the bubble were actual preconditions, others were co-conditions. Again, I think a feedback loop applies. The worst of the lending occurred near the peak of the bubble, as companies tried more and more inventive (and reckless) ways of satisfying the public's demand for houses at any price.
Think of a race between greedy lenders and greedy borrowers. Whenever one got ahead, it motivated the other to run faster.
The drivel that some economists spout is astounding. I'm sure they are very bright people. But they do have a financial interest to protect for themselves and their patrons. Unfortunately they discredit themselves and any subsequent opinions they offer should be ignored if not derided.
ReplyDeleteI have been attacked by many Bubble Meter readers for this belief that buyers largely have themselves to blame for the bubble. Despite the fact that bidding wars often broke out during the bubble, in which buyers frequently bid above the asking price of the house, it is far easier for people to lay all the blame on a small group of Wall Street bankers than spread the blame over a large swath of the American public.
ReplyDeleteI have argued the same thing on my blog back when I was blogging.
Buyers have no one but themselves to blame. But it is easier to blame others after all.
Marinite
The fact that 'typical' or 'traditional' or 'fundamental' economic theory doesn't account for all the causes of the bubble would tell me these fellows need to rethink some of their 'typical' and 'traditional' and 'fundamental' theories. Start with mob psychology and the spatial hierarchies of commission sales persons and lenders. Fellow Ivy Dubya would be impressed by their strategery.
ReplyDeleteOK, fine. Easy money didn't cause the bubble, just like guns don't shoot people. If there wasn't an appetite for buying, rates could be zero and a bubble would not happen.
ReplyDeleteBut conversely if there was a massive appetite for buying but let's say there were no loans available, surely a bubble wouldn't occur in this case either.
So cheap money was not causal, at least not solely.
Bubbles require both the will and the ability to buy.
So who is to blame?
Personally, I believe we have the responsibility to understand what we are doing. If I buy over my head and suffer for it -- my bad.
I work in a low income clinic, and I can testify that a good slice of the population can't make decisions at that level. They just see the buying frenzy and rely on the media and equally uninformed friends for advice.
These buyers are victims.
In any case, the professors shouldn't be out in the real world where they might hurt themselves, and absolutely no one should take them seriously.
We have learned nothing, I'm afraid. Before long we'll be back to 'there is no bubble' and it will all start over.
Sorry about posting ANON -- can't seem to log in and I didn't want to dump my post to sort things out with Google. I'll do better next time.
Yeah james, I think we're on the same page on this one.
ReplyDeleteI think there's a bit too much focus by many posters here on "blame". But when it comes to rational analysis and policy decisions blame, from a moralistic standpoint, is beside the point. If you want to blame foolish buyers (who I believe do hold significant responsibility) or banks or Jesus, fine. But what I care about, and what I think we all should focus on, is how to change the system to prevent another similar bubble and all the collateral damage to the economy as a whole. Its about building an economic and regulatory framework that provides maximum stability, growth and fairness. Blaming is a waste of time and emotion.
ReplyDelete