A response left to an article on Marginal Revolution about the housing market.
Let’s go back to the Shiller graph, now updated to 2017. Over the entire 20th century real home prices averaged an index value of about 110 (and were quite close to this value over the the entire 1950-1997 period). Over the entire 20th century, housing prices never once roce above 131, the 1989 peak. But beginning around 2000 house prices seemed to reach for an entirely new equilibrium. In fact, even given the financial crisis, prices since 2000 fell below the 20th century peak for only a few months in late 2011. Real prices today are now back to 2004 levels and rising. As I predicted in 2008, prices never returned to their long-run 20th century levels.
As an aside, I would consider the bubble not the long-term trend, but the peak where the index nearly hit 200 in the mid 2000’s. The long term trend is definitely upwards–but I suspect closer to the line formed by drawing a line at the troughs in the mid 1970’s, mid 1980’s, mid 1990’s and the bottom of the index in 2011. Excesses above this line may represent a pricing bubble. (Interestingly enough, that line, if drawn backwards, intersects the valuations in the 1920’s.)
My parents are in construction, and one data point they saw in the early 2000’s which (to them) indicated a bubble was the wide variety of “flip this house” shows where some married couple would stumble into a fixer-upper, stumble around breaking things and doing a lot of very bad “DIY” construction, bring in some contractor to help them fix what they broke, then sell the house a few months later at a huge profit.
My parents opinion: that much “stupid money” cannot last forever.
But at the time a lot of people my parents worked with thought the idea of a housing bubble was ridiculous and this was the new normal. They believed land use restrictions combined with population increases made higher housing prices a simple fact of life–and because of that, the bankers my parents knew believed it was fine to lower standards for making a housing loan. After all, if the value of the house will continue to go up, it reduces the risk that a foreclosed house will entail a large loss–and in some markets, even a trashed foreclosed house would turn a profit.
It’s why I get so irritated when I hear people trying to blame banks or Democrats in congress or whatever on the housing bubble. The fact is, it was everyone’s fault. The handful of people who thought there was a bubble were decried as paranoid idiots right up until the first wave of ARMs went into foreclosure.
Remember this blast from the past? https://mises.org/library/housing-bubble-myth-or-reality
Now it could be that today, land use restrictions–imposed by governments, by geography and by transportation logistics (which limit the desirable size of a city to what one can cross in a car in half an hour or so)–is driving up the price of housing. It would explain the rise in housing prices in Europe, where similar land use restrictions exist.
Or it could be a lot of people in places like China are parking their money in hard assets, uncertain of the stability of their own economies. (We see this in places like New York and Los Angeles, and increasingly even in smaller markets as well.) The nice property of an American house to a Chinese businessman is that it represents a secure asset that can be liquidated relatively quickly.
If it’s the later, then we may be living in another housing bubble–driven by outflows of capital from China. And if that’s the case, this bubble will last right up until something snaps in the Chinese economy (which arguably cannot be propped up by the Chinese government forever)–at which point we’ll see a re-run of the bubble pop in 2008 as those Chinese businessmen try to get their money back out.