Flashback 2005: Margaret Hwang Smith and Gary Smith said "there is no bubble"

Margaret Hwang Smith and Gary Smith, economics professors at Pomona College in Claremont, California, argued in a paper titled "Bubble, Bubble, Where’s the Housing Bubble?" that "there is no bubble in the prices of single-family homes in 2005."

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.

Flashback 2005: Bernanke on housing and consumer debt

Here are two nuggets from Ben Bernanke's congressional testimony before Joint Economic Committee at the peak of the housing bubble. The first one comes from testimony he gave exactly four years ago today:

March 8, 2005:

Some observers have expressed concern about rising levels of household debt, and we at the Federal Reserve follow these developments closely. However, concerns about debt growth should be allayed by the fact that household assets (particularly housing wealth) have risen even more quickly than household liabilities. Indeed, the ratio of household net worth to household income has been rising smartly and currently stands at 5.4, well above its long-run average of about 4.8. With real disposable income having risen over the past few quarters, most consumers are in good financial shape—a positive indication for household spending. One caveat for the future is that the recent rapid escalation in house prices—11 percent in 2004, according to the repeat-transactions index constructed by the Office of Federal Housing Enterprise Oversight—is unlikely to continue. A plausible scenario is that house prices will either move sideways or rise more slowly during the next few years, eventually bringing the rate of return on housing in line with the relatively low prospective rates of return that we currently observe on virtually all assets, both real and financial. If the increases in house prices begin to moderate as expected, the resulting slowdown in household wealth accumulation should lead ultimately to somewhat slower growth in consumer spending.

October 20, 2005:

House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas. House prices are unlikely to continue rising at current rates. However, as reflected in many private-sector forecasts such as the Blue Chip forecast mentioned earlier, a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.

The Washington Post has a blast from the past here.

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.

Flashback 2006-2007: Peter Schiff warned of danger

Cool video: Peter Schiff warned of financial and economic danger. Others laughed at him.

Flashback 2006: "There is no bubble in real estate"

From two years ago today, Rick Snyder denied the existence of a housing bubble:

You hear it in the morning news shows, on the cable networks, and in local news papers. Screaming so called investment professionals saying the housing bubble is bursting.

As a real estate professional, I am regularly asked how I am doing with the market so far down. My answer is, “what are you talking about”? I have been working with buyers and sellers the same now as BB (Before the Bubble). I would like to take this time to say that there is no bubble in real estate. The bubble was coined for the dot com industry that exploded when the paper stock could not be sustained. Real estate buying and selling is the life blood of the United States of America; it has always run the economy and always will. ...

Boise Idaho is a hot market that families from other parts of the nation want to live. We are going to continue to be that hot market. I am proud of our Home, and will continue to provide trustworthy guidance to my clients.

Flashback 2005: No bubble in San Diego

Three years ago today, Kevin Forrester, president of the North San Diego County Association of Realtors, said "the housing bubble is an economic myth":

San Diego County has experienced unprecedented increases in real estate values in recent years, with homes appreciating as much as 20 percent to 30 percent a year.

Such appreciation has given rise to the notion that there is a "housing bubble" — that is, an unsustainable gain in home prices that, in effect, creates a price bubble that will suddenly "pop," resulting in a loss of equity by homeowners.

The housing bubble is an economic myth, particularly in North San Diego County, where demand for housing has long outstripped supply — even in today's cooling market. A cooler housing market in which price increases are more in line with other economic growth factors does not signal the bursting of any so-called housing bubble — or the end of a vigorous housing market. Housing price increases can level off significantly and still provide good investment opportunities for buyers and sellers alike. ...

The only threat we face is loss of confidence on the part of those who want to buy or sell homes and other real estate. The plain fact is there is a lot of misleading and jaded information out there.

For example, those pundits who try to compare real estate to NASDAQ's meteoric rise are missing a couple of important points. Unlike stocks, real estate, especially at the national level, rarely decreases in value. Even when declines have occurred, they've been modest at best. ...

In the end, it is the marketplace — not panicky doomsayers — that will determine the future of our region's housing market. Continuing confidence in the viability of San Diego County and the fact that more people want and need to live here is the best evidence there is to disprove any housing bubble.

Mr. Forrester forgot to mention that the significant financial leverage (i.e. the mortgage) used to purchase a home greatly magnifies the effects of even a small percentage decline.

He also engaged in the type of thinking that says "the place I live is special, so even if prices fall elsewhere, they won't fall here because of its specialness." In fact, southern California is ground zero for the housing decline. Whoops!

Flashback 2006: Realtor Marlene Goldberg said no bubble

Two years ago today, Realtor Marlene Goldberg chose to shoot the messenger for "exaggerated and inflammatory" bad news about the housing market:

There is NO real estate “bubble.” The slowdown appears to be psychology oriented and has been egged on by constant articles and comments in the press. The reports are greatly exaggerated and inflammatory and designed to cause trepidation amongst consumers. It is a known fact, that negative news sells many more papers and garners more attention than positive news.

Consider the following facts: Appreciation rates are slowing but not declining. That means prices in most of our market areas will continue to climb but at a more gradual pace than in previous years. The economy is healthy in our area and is generating jobs. This leads to continued demand for real estate. ...

The fundamentals leading to a continued vigorous real estate market are strong. There are 78 million baby boomers. Single women are the single largest growing segment of our population and they buy more real estate than other segments of the population. There is still a high rate of immigration and as many as 25-30% of houses purchased are purchased by someone not born in the U.S.

So, in contrast with the past few years, housing is slower, but market fundamentals are still very strong.

Flashback 2006: Housing market "taking a short break"

Two years ago today, real estate blogger Terri Murphy wrote:

Unless you are disconnected from the media, there is relentless babble about the housing "bubble" and how the sky is falling and, well, aren't we in a housing mess?'

What is interesting, however, is there are solid, positive facts that still prevail even though our market is said to be soggy and in reality, might really just be "taking a short break". ...

Our robust economy will not enable the housing market to crash. It will only accommodate the modest downturn we have already felt in the humble opinion of this writer.

In retrospect, the humble opinion of Terri Murphy doesn't seem to be worth much.

Flashback 2005: "Little evidence of a housing bubble"

I missed the anniversary of this one. I apologize.

From September 25, 2005, the geniuses at two Ivy League business schools said there was little evidence of a housing bubble:

Most cities in the United States showed little evidence of a housing bubble as of the end of 2004, according to a new study conducted by Columbia Business School and the Wharton School of Business at the University of Pennsylvania, which looked at 46 single-family housing markets from 1980 to 2004.

The researchers found that recent growth rates of home prices do not reflect a bubble and were largely explained by basic economic fundamentals such as low interest rates and strong income growth among high-income Americans.

No evidence was found that buyers are bidding up the price of houses based on unrealistic expectations of future increases.

Flashback 1999

The Dow Jones Industrial Average first crossed above 10,000 in early 1999, about 9½ years ago. Within a few months, James K. Glassman and Kevin A. Hassett were predicting a rise to 36,000 within a few years. Yesterday, the Dow fell below the 10,000 mark.


From Wikipedia: "As of September 2008, Hassett was serving as an economic advisor to John McCain's Presidential campaign." That ought to inspire confidence.

Happy 10th Birthday, Wall Street Bailouts!

Today is a very special day! Today is the 10th birthday of the Wall Street bailouts. It was ten years ago today, on September 23, 1998, that the Federal Reserve bailed out Long Term Capital Management. MarketWatch takes us on our joyful 1998 flashback:

LTCM was a hedge fund run by former Salomon Brothers bond whiz John Meriwether and a half dozen other traders. They raised $1.01 billion in 1994 and ended up with derivative positions of about $1.25 trillion, built on leverage, when the bets turned bad and lenders started asking for their money in the summer of 1998.

LTCM was strapped for cash. So, rather than unwind its positions and send the market into turmoil, the Federal Reserve Board of New York organized a $3.75 billion bailout paid for by Wall Street banks. The cash allowed LTCM to meet its obligations as it unwound its trades.

Maybe it's because the numbers seem small by today's standards, but LTCM caused a lot of anxiety at the time. The day after the bailout was announced, the Dow Jones Industrial Average fell 2%, mostly because investors feared the banks would lose their investment. The fall was followed by another 3% drop two trading days later when investors worried the Fed didn't do enough.

Flash forward to 2008. ... You can't blame Rick Wagoner at General Motors or Glenn Tilton at UAL Corp. for passing the hat to Uncle Sam. These CEOs have seen what a little government intervention can do, whether it be banning naked short selling for a few bank stocks or propping up the entire mortgage banking industry with billions in backing.

The taboo against bailouts has been broken. Now the problem is that everyone is rushing the government at the same time. Wall Street firms ran up risk for a decade after the LTCM bailout precisely because there was a bailout.

The unwritten message, what the bankers call moral hazard, was simple: come a crisis, the government will do everything it can to avoid a collapse.

It makes a nice bedtime story, doesn't it?

The Fed chose not to worry about moral hazard then, because it felt the immediate problem was far more important than any increased financial risk-taking it might encourage in the future. Such short-term thinking only causes greater problems in the long run. The Federal Reserve and the U.S. Treasury are again making short-term decisions without any regard to the long-term consequences.

Flashback 2005: Neil Barsky Asks "What Housing Bubble?"

From July 28, 2005—exactly three years ago today. Neil Barsky, writing in the Wall Street Journal, insisted there was no housing bubble.

If you want to be scared out of your wits these days, you basically have two choices: go watch Steven Spielberg's latest, or listen to the hysterical warnings of economists and journalists about the imminent popping of our so-called housing bubble. Robert Shiller, the ubiquitous Yale economist, says home prices could fall 50% from their peak. Taking things a step further, The Economist recently went so far as to call the global housing boom "the biggest bubble in history."

In a free country, it is fair game for the media and economists to scare homeowners with words of gloom and doom, however knee-jerk, consensual and misguided they may be. But housing is a serious business; for most of us, it is our most valuable asset. For generations of immigrants, home ownership has represented the realization of the American dream.

The reality is this: There is no housing bubble in this country. Our strong housing market is a function of myriad factors with real economic underpinnings: low interest rates, local job growth, the emotional attachment one has for one's home, one's view of one's future earning- power, and parental contributions, all have done their part to contribute to rising home prices. Over the past quarter-century, there has been an explosion of second-home purchases, a continued influx of immigrants, and a significant reduction in existing housing inventory through tear-downs. Not all of these trends are accurately reflected in the unending stream of data published daily. Home prices on average have risen at a 6% annual pace since 1999, and 13% over the past year.

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

Congratulations, Neil Barsky! 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.

Flashback 2005: Was It a Boom or Bubble?

Googlefight results posted on Bubble Meter on July 28, 2005:


Googlefight results three years later:

Flashback 2005: Ken Fisher Says He's Confident There's No Housing Bubble

Let me ask you, seriously, would you buy investment advice from this man?

Here's the advice Fisher Investments gave regarding the housing bubble in its Q3 2005 Stock Market Outlook. (Unfortunately, I can't link to it because I have it in hard copy. I saved it because of the ridiculous housing bubble prediction.) Summer of 2005, let me remind you, was the peak of housing bubble activity.

"Bubble" Paranoia is Good News

The Economist's June 18 cover story "House Prices—After the Fall" sums up the international mood—a global real estate bubble is on the verge of bursting. This fear is bullish. Real bubbles are seldom referred to as bubbles in the press until after they've burst, so there's little need to worry now. If there isn't a bubble, that's good news for stocks, the health of the global consumer, and in turn, the global economy.

The technology stock bubble burst just a handful of years ago but investors have already forgotten its origins. Remember that it wasn't much called a bubble until after it burst. Bubbles tend to occur when fear is replaced by phrases like "new economy" and "it's different this time." A healthy dose of fear reduces risk for investors. It's the wall of worry bull markets like to climb. We don't have a specific forecast for home prices from here and don't claim to be real estate experts, but we're confident there's no bubble to worry about.

Ken Fisher's reasoning here is flawed. I remember the late-1990s' stock market bubble quite well. There were lots of people warning about a bubble then, including—oops!—The Economist. Perhaps Forbes Magazine (which Ken Fisher writes for) wasn't warning about it, but many people in the press were. Did he forget Alan Greenspan's "Irrational Exuberance" speech? Bubbles occur, not due to a lack of warnings, but due to people disregarding the warnings in the quest for the quick buck.

Other advice from Ken Fisher in his Q3 2005 Stock Market Outlook: "The dollar rally should continue."

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.

Flashback 2007: Subprime Derivatives Explained

This video comes from exactly one year ago today:

Flashback 2000: That Bubblin' Crude

From The New York Times exactly eight years ago today:

Gov. George W. Bush of Texas said today that if he was president, he would bring down gasoline prices through sheer force of personality, by creating enough political good will with oil-producing nations that they would increase their supply of crude.

"I would work with our friends in OPEC to convince them to open up the spigot, to increase the supply," Mr. Bush, the presumptive Republican candidate for president, told reporters here today. "Use the capital that my administration will earn, with the Kuwaitis or the Saudis, and convince them to open up the spigot."

Implicit in his comments was a criticism of the Clinton administration as failing to take advantage of the good will that the United States built with Kuwait and Saudi Arabia during the Persian Gulf war in 1991. Also implicit was that as the son of the president who built the coalition that drove the Iraqis out of Kuwait, Mr. Bush would be able to establish ties on a personal level that would persuade oil-producing nations that they owed the United States something in return.

"Ours is a nation that helped Kuwait and the Saudis, and you'd think we'd have the capital necessary to convince them to increase the crude supplies," he said.

I'm glad to see it worked out so well. Any comments from readers?

Flashback 2005: We Were Warned!

From June 18, 2005—exactly three years ago today:


Many people who believe in the magazine cover contrary indicator used this cover as evidence that there was no housing bubble. Of course, they ignored the Time cover from a week earlier.

The problem with using The Economist as a magazine cover contrary indicator is that The Economist is usually contrarian to begin with. (Their 1998 cover predicting that oil prices would keep falling is a glaring exception.)

During the late 1990s, The Economist correctly and repeatedly warned that stocks were experiencing a bubble. Likewise, during this decade it correctly and repeatedly warned that housing was experiencing a bubble. If anything, The Economist tends to warn too early, while most publications tend to warn too late.

Flashback 2005: America was going gaga over real estate

From June 13, 2005—exactly three years ago today: