In a bubble, market prices are far above fundamental values calculated with reasonable assumptions about the future cash flow. By this definition, there is no bubble in the prices of single-family homes in 2005. ... The observation that real estate prices are higher than they used to be or higher than the values predicted by models using historical prices does not prove that current prices are above fundamental values. ... The relevant question, however, is not how much prices have increased in the past or how fast people expect them to increase in the future, but whether, at current prices, a house is still a fundamentally sound investment. Our answer is generally yes, if the owner plans to stay in the area for many years to come.
If housing was "still a fundamentally sound investment" near the peak of the market, then why is the federal government today trying to rescue homeowners from foreclosure? Why is the Smiths' home state of California in such an economic mess?Congratulations, Margaret Hwang Smith and Gary Smith! I hereby award you the James K. Glassman and Kevin A. Hassett Award for being completely unable to recognize an asset bubble.
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"The observation that real estate prices are higher than they used to be or higher than the values predicted by models using historical prices does not prove that current prices are above fundamental values."
ReplyDeleteThis sounds like the argument used for the over priced DC area.
The other is "Incomes in the DC area are higher than the rest of the country"
As if incomes shot up 500-800% in the past 10 years like home prices have.
Goes to show that you can have degrees, professorships, titles and credentials and still be a complete idiot.
ReplyDeletePerhaps we can start another blog about the bubble in college tuition and the demise of our educational system.
i wouldn't insult. things go wrong everyday because people made errors in designs, calculations, inadvertent exclusion of relevant data, and sometimes the bias the comes with trying to prove a hypothesis. education, experience and knowledge is never ever a guarantee of a good outcome. that's the real value of hindsight and the source of present hubris.
ReplyDeleteYou didn't need hindsight to see the housing bubble in 2005...only a brain.
ReplyDeletewireknob said...
ReplyDeleteYou didn't need hindsight to see the housing bubble in 2005...only a brain.
The problem is that it was common among both Keynesians and Friedmanites that "bubbles" can't exist. They both had absolutist, ideological views that "markets always get it right," a byproduct of an era of deregulatory politics.
It's incorrect to say leading economists (PhDs) don't have a brain. Like anyone else, they let their ideology dictate their view of reality (instead of vice-versa).
For example, Frederic Mishkin was an academic consultant to the Fed, and later appointed a member of the Fed's Board of Governors. January 2007 he espoused the markets-get-it-right article of faith:
"First, one must assume that a central bank can identify a bubble in progress. I find this assumption highly dubious because it is hard to believe that the central bank has such an informational advantage over private markets…"
The "markets-get-it-right" blindness affected some very smart people.
FWIW: in November 2009 Mishkin articulated the more reasonable position that bubbles can be identified, and that our risk today isn't a bubble, but the ongoing unwinding of toxic assets:
"But if bubbles are a possibility now, does it look like they are of the dangerous, credit boom variety? At least in the US and Europe, the answer is clearly no. Our problem is not a credit boom, but that the deleveraging process has not fully ended. Credit markets are still tight and are presenting a serious drag on the economy."
It's easy to toot one's own horn ("I told you so."). But, most of those folks are perma-Bears unable to recognize an upturn. Proverbial stopped clocks. A lot of people insisted the government bailout and stimulus couldn't have an effect on the economy. They're strangely silent. Shiller identified the Bubble when it was unpopular to do so. But, today he's suffering from the same problem: he can't see recovery because his models don't provide for it. (The economic model takes precedence over reality.).
Mark
"Shiller identified the Bubble when it was unpopular to do so. But, today he's suffering from the same problem: he can't see recovery because his models don't provide for it."
ReplyDeleteNo, I think Shiller has been a lot more optimistic than those that you are dismissing with a "perma-Bear" ad hominem fallacy. Even if your criticism of Shiller weren't factually incorrect, isn't it a wee bit premature? You can't possibly know now whether the economy is genuinely recovering or if the "green shoots" are contrived and non sustainable (like the cash for clunkers program and home buyer tax credits).
Anonymous said...
ReplyDeleteNo, I think Shiller has been a lot more optimistic
There was an article on this blog a few days ago. An interview with Shiller, where it sounded like he was denying the current market conditions because they don't fit his economic models:
"At one point I said, “You seem so conflicted.” He said, “I am terribly conflicted. This is the most uncertain time that I can remember. Things are violating the laws that I learned. The turn around in real estate is so dramatic. The whole country is experiencing an upsurge but I don’t know what to make of it.”
Anonymous said...
You can't possibly know now whether the economy is genuinely recovering or if the "green shoots" are contrived and non sustainable (like the cash for clunkers program and home buyer tax credits).
You're right. But, I'm thinking more about the perma-Bears who say the stimulus programs can't affect a change in the market, and then attribute the change in the market to the stimulus (as if it's not a real change).
Like the recent article saying the revised GDP was because the stimulus didn't work as well as expected (ignoring how the revised GDP had auto sales up a whopping 8-fold).
I agree that we don't know how strong the recovery will be as the various stimulus is removed. I've often said that I hope it's removed in steps, not a drop-dead date.
But, that's a little different than perma-Bears who seem to bet on every horse in the race. Or, remain bearish long enough that their prophecy comes true (stopped-clock syndrome).
I'm not applying that depiction to Shiller. My comment about Shiller was just an example of how some really smart guys are often confounded by the models they place great faith in. Like Mishkin, and all the economists discussed in the NT Times article I posted the other day.
Mark F. said: "It's incorrect to say leading economists (PhDs) don't have a brain."
ReplyDeleteYou're absolutely right. I should have said that they aren't using their brains. Basing opinions on ideological doctrine and received wisdom is stupid, so I stand by that characterization.
Also, PhDs don't necessarily mean much...especially these days. College degrees are becoming more like receipts than credentials. I think the failure of most economists to recognize some blatantly obvious speculative bubbles over the past decade clearly illustrates that point.
wirenob said...
ReplyDelete"Also, PhDs don't necessarily mean much...especially these days. College degrees are becoming more like receipts than credentials. I think the failure of most economists to recognize some blatantly obvious speculative bubbles over the past decade clearly illustrates that point."
Two responses:
1) I bet the correlation between education level and intelligence is strongly positive.
2) Someone please show me where in the economics curriculum bubbles are even taught at all. I certainly didn't encounter them in my undergraduate studies. Check the typical economics grad school curriculum. The only course I see that is likely to discuss bubbles is financial economics. That's where the efficient market hypothesis is taught. How can Ph.D.'s be experts on something they haven't studied?
James, you're probably right about the correlation between education and intelligence, but that is a statistical measure. That is to say, there are many not-so-bright people that hold advanced degrees, and their are plenty of really smart people that didn't pursue an academic path.
ReplyDeleteAlso, not to needle you too much, but do smart people really need to take a specific class to reason out and understand each situation they are confronted with? Isn't the primary goal of education to teach people how to apply their own intellect to different situations, and not just to imprint the contents of textbooks on their brains? And, are you really an expert in anything if you all you can do is recite what you've been taught (i.e., indoctrinated in)?
Perhaps if people independently applied their own reason to the housing bubble, instead of passively accepting the opinions of the supposed experts, more people would have recognized the situation for what it was and avoided calamity.
Anyway, just my opinions.
James,
ReplyDeleteOff topic. But, I want to ask why the chart on the main blog page shows prices from 1890. But when I click it, it shows only prices since 1970.
IMO, the 1890 chart is deceptive because I don't believe prices would rise at a steady rate as populations rise and demand for land increases. For example, coastal real estate has risen faster than other populated areas due to demand. It stands to reason that populated areas would rise faster than rural areas.
It seems like the flat line in the first 2/3 of the 1890 chart is irrelevant.
Feh.
ReplyDeleteAfter nearly a decade of the Bush Administration, the idea that anyone would ever be discredited for being wrong is so quaint.
Bill Kristol's still on TV every Sunday, and has a regular column in the NYT. What makes you think there'd be any accountability for people who were staggeringly, incomprehensibly wrong?
Mark F said...
ReplyDelete"Off topic. But, I want to ask why the chart on the main blog page shows prices from 1890. But when I click it, it shows only prices since 1970."
Hey Mark, no problem. The 1890-2008 graph shows Prof. Robert Shiller's data from irrationalexuberance.com. However, at the time I created the graph, I didn't understand how he was switching from annual to quarterly data, so my version of his graph only shows annual data through the most recent full year (2008).
The graph on my website is entirely my own creation. It uses quarterly data from beginning to end. I use a different measure of inflation than Prof. Shiller does. I also use a different home price index prior to 1975. From 1975 until present, I use the same housing data sources as Prof. Shiller, except he mostly uses annual data while I use quarterly data.
Mark F said...
"IMO, the 1890 chart is deceptive because I don't believe prices would rise at a steady rate as populations rise and demand for land increases. For example, coastal real estate has risen faster than other populated areas due to demand. It stands to reason that populated areas would rise faster than rural areas.
It seems like the flat line in the first 2/3 of the 1890 chart is irrelevant."
I'm not sure I follow all of that. Both graphs measure median prices, not mean prices. As anyone who studies statistics learns, median values are generally considered a better representation of reality that mean values.
The 1890 graph measures actual data. I don't understand why you think it's deceptive. Do you think it's deceptive because the data isn't what you think it should be?
Yes, coastal areas may rise faster than rural areas, but the graphs measure MEDIAN home prices. Since most Americans live in metropolitan areas, rather than rural areas, the graphs will reflect home prices in metropolitan areas.
I don't understand why you think the first 2/3 of the 1890 chart is irrelevant. You're not suggesting that suddenly around 1970, people started moving to the coast, are you? America is more urban than it used to be, but it's not like Americans just started moving to the east coast recently. It's where the pilgrims landed.
I have a question about your blog but can't find contact info anywhere. Can you please email me at brandon at fhaloansource dot com? Thanks!
ReplyDeleteHello, for all students (at least high-school and the undergraduates) and others with an interest or enrolled in economics I have started a blog which will comprise study literature in a more entertaining form than standard textbooks, see
ReplyDeleteCrisisMaven’s Economics Study Guide. While still in its initial stages it will be added to constantly and covers general ecenomics subjects while at the same time dealing with current topics from the news that provide a welcome backdrop to an elucidating chapter in economics as well, e.g. Of Mortgage Brokers, ARMs, Attrition and Marathons .