Wednesday, September 16, 2009

When Did The US Housing Bubble Begin?

In his most recent post on "Economics and its Discontents" on economic principals, David Warsh asserts that the US housing bubble occurred during 2003-06. In a thread following a post on this on Economist's View, I questioned this and said that it began in 1998, only to get a lot of criticism from others, with alternative beginning points being posed, including 2000 and 2001. I replied by noting that if one looks at the price-to-rent and price-to-income ratios for housing from both of the two indexes available (Case and Shiller and OFHEO, the latter having the bubble peaking in early 2007, while Case and Shiller say mid-2006) that showed these ratios taking off in 1998, although basically nobody noticed at the time because we were nearing the end of the dramatic bubble that crashed hard in early 2000. One can find a source for the OFHEO one here and for the Case and Shiller one here.

Now, part of what has people nonplussed I think is that both Kindleberger and Minsky used to argue that most bubbles start with some sort of identifiable "fundamentals displacement" that starts some price or prices on an upward path that then turns into a speculative bubble. But it is hard to identify such a displacement for housing in 1998. However, it seems that this is the case for some other of the really large bubbles of history, including the Mississippi one of 1719-20, the South Sea one of 1720, the 1920s stock market bubble, the 1980s one as well, and probably the bubble also. I wrote about this back in 1991 in my book, From Catastrophe to Chaos: A General Theory of Economic Discontinuities (repeated in second edition, 2000) on p. 61 as follows.
In all four of these cases the bubbles emerged after relatively long periods of general economic growth. Thus it may be that the trigger of these bubbles was a critical accumulation of general confidence and enthusiasm without any specific displacement of any fundamental being involved. It may well be that other episodes which have apparently begun with fundamental displacements may in fact have been "misspecified fundamentals" on the part of the participants. They mistakenly forecast that the initial displacement represented the future trend of the fundamental and the collapse of prices came when the illusion vanished. In this respect the lack of a clear initial displacement may be a way of identifying a pure speculative bubble. The pure bubble simply emerges from the swelling sea of boundless optimism, like Aphrodite from the froth.


TheTrucker said...

The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, securities firms and insurance companies to consolidate (destroying transparency and inter company checks and balances) and The Commodity Futures Modernization Act of 2000 then provided Legal certainty through regulatory exemptions for CDS's between "sophisticated parties". These two acts allowed the creation of the big bubble machine in the sky.

But in my opinion ignition and liftoff were provided by The Taxpayer Relief Act of 1997. "The act exempted from taxation profits on the sale of a personal residence of up to $500,000 for married couples filing jointly and $250,000 for singles." So Joe the Plumber cashed out og his house to gamble in the NASDAQ and took those winnings and became a house flipper.

I really like this picture. If the "boom" would have peaked at 125 or 130 in 2000 or 2001 it would not have been called a bubble. We only entered bubble land after 2001. It is sorta like this picture that shows us the actual NASDAQ bubble from 1998 to 2001 and illustrates that only the NASDAQ bubbled, and then a mild dip in GDP occurred.

But what does this have to do with "economics". It looks like standard carnival Republicanism to me. How does this link into Keynes VS Friedman?

Richard Green said...

FWIW, I bought a house in Bethesda, MD (which has an active rental market for single family homes) in 2002. The after-tax cash flow costs of owning and renting were essentially identical, so even if prices had stayed flat, I would have only been out the closing costs. Even though the price seemed ridiculous compared with what I sold my house for in Madison, it also seemed fundamentally correct.

By 2004, however, things had clearly gotten out of hand. It seems to me that the bubble, in DC at least, started around 2002.

(BTW, I have done some econometric modeling of quality adjusted rents and prices that also suggests that 2002 was not too far out of whack).

Anonymous said...

I think you are off by about 60 years, and are too restrictive in your scope.

The "housing bubble began in the 1930s, and was not confined to housing: the entire economy became a bubble.

To give an example for why I say this just try calculating the median price of a single family home in terms of how many hours it would take a worker to its equivalent in wages.

In 1964, the median price of a home was $18,900, and the average hourly wages was $2.50 - so it would take a worker earning the average wage about 3.5 years to earn what it cost to buy a home.

In 1984, the median price of a home was $79,900 and the average hourly wages was $8.38 - so it would take a worker earning the average wage about 4.6 years to earn what it cost to buy a home.

By 2006, at the top of the bubble, the median price of a home was $246,500, and the average hourly wages was $16.43 - so as the economy finally began to unravel, it took a worker earning the average wage about 7.4 years to earn what it cost to buy a home.

As measured by the average hourly wage, the price of a home doubled in just under 50 years.

But, hey! During that same period productivity increased by - what? - 4-fold. So, that would mean the cost to build a home profitably fell from about 3.5 years of average wage, to about 10.5 months of wage.

So if homes were getting cheaper to build, why were the prices of home rising? And not only in the past ten years but for at least fifty!!!?

Economists have never even asked why prices rise even as productivity increases, because it never enters their mind that it is a question which must be answered.

The field is hopeless beyond salvaging...

Myrtle Blackwood said...

In 1971 my friends from Newark New Jersey decided to settle in Tasmania. They purchased 23 acres of agricultural land and a shack-like farmhouse (with fencing, water tank and other infrastructure) for $1,500. In 2008 the same property sold for $185,000. This sale price incorporated the cost of some minimal improvements only because this family opted to travel around the world rather than spend funds on upgrading their property.


There is a graph showing the rise of house prices in the US since 1973. "Overall, the median house price in the U.S. appears to have grown at an average annual rate of 5.5%, at least since 1973. "

Barkley wrote: "Minsky used to argue that most bubbles start with some sort of identifiable "fundamentals displacement" that starts some price or prices on an upward path that then turns into a speculative bubble. But it is hard to identify such a displacement for housing in 1998.

The 'fundamental displacement' could be seen to be the rise of the planetary enterprise - the global corporation. In 1974 it was noted that The average growth rate of the most successful global corporations is two to three times that of most advanced industrial countries, including the United States."

One of the interesting facets to the development of the non-market (intracorporate transactions dominating world 'trade') is that nations have more alternatives in the way they use or develop resources than the corporation has in finding substitute sources. (page 200, Global Reach by Barnet and Muller, 1974).

This latter observation might explain one of the dynamics behind the formation of a whole assortment of bubbles. If corporations hold sway over economic decisions their limitations would encourage monocultures of 'economic development'. Bubbles in housing, tree plantations, GM soy crops, pesticide production, war etc.

Barkley Rosser said...


The tax code favored housing even before 1997, but maybe the further move to do so helped trigger the takeoff. Another possible trigger was a brief period of low interest rates in late 1998 after the Russia-LTCM crisis.

I note that many Austrians like to blame all bubbles on overly loose monetary policy and interest rates being too low, which leads some of them to agree with Warsh that 2003 was when it started.

I do think it would still have been called a bubble if it had peaked out in 2001, but not much of one. After all, the late 1980s surge in some cities was called a bubble, and by 2000 the Case-Shiller index had gotten about as high as the 1989 peak of that earlier one.


You had a house in Madison? I have old and long Madison connections.

In any case, I am not going to challenge your calculations. I would note that an important fact of the housing bubble was that it was very different in different places, which was one of the reasons all those derivatives writers thought they could write all those MBSs because there was supposedly no correlation across the various housing markets.

This latter proved to be false ultimately, but still there were markets where there never was a bubble in the US, and others where it was very minor. Indeed, this is a source of the difference between the Case and Shiller index and the OFHEO one. The former covers only 20 large cities, where the bubble was more concentrated, while the latter covers smaller towns and rural areas, where it was less strong (draws on data from sales involving Fannie Mae or Freddie Mac).


I'll go with Shiller's data set, which Trucker linked to. That says housing prices were especially low in the 1930s. There was a surge of housing prices right after WW II that matched what we saw in more recent years. But, that one was due to clear fundamentals, supply and demand conditions. There was a surge of demand from the returning vets ready to boom babies, while almost no housing had been built for about 15 years. Otherwise, according to Shiller, most of the time the price of housing has risen pretty closely in lock step with real incomes.


You may be right about Tasmania, and I have heard of the housing bubble being even stronger in OZ than in the US. I know it has been in some other countries, including UK and Ireland and Spain.

In terms of this more recent bubble, I do not think there was enough change in the conditions you mention to be responsible for its particular emergence, beyond simply making it easier for such things to happen.

I might note here the basis of some of the arguments for other dates that have been mentioned. I did see somebody mention 2002 that Richard Green suggests for Washington, but do not remember the argumnet for it. For 2003, well, there was a notable acceleration of it in that year, but it was already pretty high and in full blast as far as I am concerned.

The argument for 2001 is simply inane. Someone wanted to blame the whole thing on the Bush administration and leave the Clinton administration blameless. Therefore it could only start in 2001, even though Clinton had the whole of the bubble in his presidency.

I have more sympathy with the argument that was made for 2000. The point was to claim you only have a bubble when people start noticing the price and changing their expectations. I think 2000 was certainly a time when a lot of people starting paying attention to housing prices. I remember well hearing people I know talking about "investing in my house" after the stock market crash in early 2000, with many who had no intention of selling in the near future doing things like major overhauls of their kitchens or bathrooms or adding additions, often with this argument of this being a "good investment since housing prices will only rise."

Barkley Rosser said...

As for me, I will stick with the definition of a bubble I have used in papers and books for a long time. A bubble is when the price starts rising above the fundamental and continues to do so for an extended period. It does not depend on people immediately noticing this, and in the case of the housing bubble, they basically did not until at least 2000. But the evidence is clear that it was in 1998 that for the national average, the price-rent and price-income ratios began to rise and kept on doing so.

Donald Pretari said...

My own view is crazier. CA has had 3 housing bubbles since 1970. I'm looking at headlines for the last bubble in Southern Cal that ended in 1990. Here's one headline:

"Housing Prices in State Climb 3% in February
Furlong, Tom; Los Angeles Times; Mar 29, 1989; Vol. 108, Iss. 116; 4; pg. 1"

I could be wrong about this, but so far the previous bubbles, or booms if they don't rise to bubble status, focused a lot on availability in CA.

"Housing Starts Surge 14.9% During January, Best Gain in 20 Months
Los Angeles Times (pre-1997 Fulltext); Feb 20, 1985; pg. 1"

In this bubble, I maintain that the bubble was caused by fear of being impoverished when old. We've had many years of being told that we can't rely on SS, that pensions are dying, etc. For many people, the only option has seemed to be to buy a house. After all, you have to pay for housing in any case. It's usually called rent. If you find it impossible to save for retirement ( in addition to saving for your kids college, etc. )because wages don't allow that, then you might well believe that your only retirement strategy, besides working until you're dead, is turning your rent into an investment,ie, a house.

I never heard anybody tell me in Northern Cal that housing prices will always rise. But I did hear a lot of people tell me that renting was a waste, and that they needed to buy a house.

Just my theory. In other words, fear of being left out in the cold for retirement drove this bubble. Essentially, fear, that the con person types love to exploit.

Don the libertarian Democrat

Myrtle Blackwood said...

"I will stick with the definition of a bubble I have used in papers and books for a long time. A bubble is when the price starts rising above the fundamental and continues to do so for an extended period."

How does that contradict what I wrote, Barkley? I'm referring to a 40 year bubble (that I know of) in housing in the US and in other places as well... as in other commodities.

In 1978 Howard J Ruff refers to a study done by Walter X Burns and Charles D Kirkpatrick (from the marketing and forecasting division of Lynch, Jones and Ryan) as reported in the Dallas Morning News:
"But the rapid rise in housing prices cannot really be attributed to population growth, scarcity of land, inflation or greatly increased family income. Rather we think we have an old fashioned mania on our hands....We believe the decline might match the 80% drop in stock prices which followed the crash of 1929."
Page 73 "how to prosper during the coming bad years" 1978

[Though there was inflation at the time from a fabricated oil crisis that apparently came about due to high levels of corporate debt.]

This graph is interesting:
US Commercial Banks: Mortgage-Related Assets/Total Bank Credit (1950 - 2005)

The Insolvency Crisis: How we got here, and what to expect
Saturday, 11 August 2007 Written by Garrett Johnson

and this one:
People, whose income has declined 1990 - 2000
The new world order and the failure of globalisation
Alan Freeman (2002): The new world order and the failure of globalisation. Unpublished.
The new political geography of poverty. University of Greenwich
[This is a fuller but earlier prepublication version of an analysis of stagnation and divergence in the world economy which appeared in Pettifor, A (2003) Real World Economic Outlook, pp152-
159. Basingstoke: Palgrave MacMillan, pp152-164. ]

and this graph: Index of house prices since 1890
The Yale economist Robert J Shiller created an index of American housing prices going back to 1890. It is based on sale prices of standard houses, not new construction, to track the value of housing as an investement over time. It presents housing values in consistent terms over 116 years, factoring out the effects of inflation.

The 1890 benchmark is 100 on the chart. If a standard house sold in 1890 for $100,000 (inflation-adjusted to today's dollars), an equivalent standard house would have sole for $66,000 in 1920 (66 on the index scale) and $199,000 in 2006 (199 on the index scale, or 99 percent higher than 1890.

In 1981 we were in a state of financial panic when the residential houses in Canberra climbed from around $29,000 for a very ordinary 3 bedroom home to $62,000 in the space of two years. We noticed the prices rising fast. Our long-time regular bank denied us a loan even though we could already pay for 30% of the house price or more. We were priced out of Canberra, thanks to this bank. (Mind you, we found something better in Tas before it was turned into one gigantic tree monoculture).

Then we bought 50 acres in Tasmania for $15,000. (1982). Two years later (due to unforeseen circumstances) we sold the same piece of land for $35,000.

Then there are the numerous other bubbles:
“In the last five years (2003 – 2008), the volume of credit derivatives has grown thirtyfold to about $55 trillion (€38 trillion), or about 20 times the gross national product of Germany.”
THE END OF ARROGANCE - America Loses Its Dominant Economic Role
By SPIEGEL Staff, 09/30/2008 06:27 PM. SPIEGEL ONLINE,1518,druck-581502,00.html

International Declaration: Stop the expansion of monoculture tree plantations! - International Day Against Monoculture Tree Plantations - 21 September 2009

Myrtle Blackwood said...

Quoting Henry CK Liu in 2005:

"US prices for existing homes have been rising more than 30% annually for almost a decade, adding significantly to GDP growth...

The real problems with $50 oil
By Henry C K Liu May 26, 2005

James said...

I noticed the housing bubble in spring of 2001, and I'm not Nostradamus, I promise. Dean Baker noticed the housing bubble in late 2002. The Economist wrote about the housing bubble as early as March 30, 2002 in an article titled "Going through the roof".

It's ridiculous to think that we were discovering the housing bubble before it began. We all identified the bubble based on valuation and above average price appreciation. It's the people who were clueless to the bubble's existence who are now claiming it began in 2003 or so.

You are right that the above average price appreciation began in 1998, so in that sense it's when the bubble began. However, if you define a bubble as an overpriced asset class, then it takes a certain amount of above average price appreciation before you reach bubble status. That would place the beginning of the bubble perhaps a couple of years later.

For anyone who's interested, I have graphs of the housing bubble here. Look a the graphs and make your own decision as to when you think it began.

Myrtle Blackwood said...

It would be useful to know (both in the case of Henry CK Liu and 'James' and others) where the data came from.

Barkley Rosser said...


The data in my links is from the best available indices for housing prices in the US, the Case and Shiller and the OFHEO. None are complete or perfect.

I would note that while the most recent housing bubble in the US started in 1998, we did have one in a number of major cities in the late 1980s (and maybe one earlier in California). Regarding Henry Liu's argument, bubbles did not start with the energy crisis of the 1970s (and higher energy costs depress some housing prices, those in the far suburbs and exurbs). Kindleberger records a bubble as early as 1618 with the collapse of the Holy Roman Empire currency at the beginning of the Thirty Years War, and the famous Dutch tulipmania was in 1636-37, well before the late 20th century energy crisis.

Shag from Brookline said...

If states serve as laboratories, then perhaps examining CA's housing "bubbles" might be insightful, especially with the size of CA's economy. Here on the East Coast, we couldn't understand why what was happening in CA with housing wasn't happening here.

When we were in the process of buying our home in Brookline in 1973 (with four kids under four), I had asked the real estate broker about property taxes on the home. She informed me what the taxes were and then said (in effect): "Oh, Mr. Shag, in your tax bracket as a successful lawyer, Uncle Sam will be subsidizing the taxes as well as the interest on your mortgage." Back in 1973, the top federal income tax bracket may have been 70%. (I did have a good practice but was short of 70%.) So tax policy perhaps served at that time as an incentive to buy rather than rent. Since then, the top tax brackets have been reduced significantly and mortgage interest deductions capped. So despite the continuing but decreasing subsidation by Uncle Sam, over time housing prices continued to increase and expand to the East Coast. Since 1973, our property tax bill has increased 10-fold despite MA's Proposition 2.5 (mildly similar to CA's Proposition 13) and until the recent Bush/Cheney financial crises, our home increased in value more than 20-fold. Our mortgage (relatively small) has long been paid off; if we were to refinance based upon current value, the interest would not be deductible beyond the original mortgage. Considering the reduction in top federal income tax rates in more recent years, Uncle Sam's subsidation has been lessened. Yet housing remains fairly high.

The $500,000 permanent deferment of tax on gain seemed to be a godsend. But some homeowners may have preferred the former "rollover" tax deferment.

So tax policy has played a part with the housing bubble. One of the things that helped to pump it up was the relative ease of refinancing, in effect using home equity as an ATM and reducing savings rates - who needs to save with home values continuing to escalate? Meantime, the American Dream was extended with subprime loans, with fees generated galore. There was extensive marketing to lure takers.

And add to this mix the condominium revolution that started in the '70s making the sum of the parts greater than the whole.

Yes, there were a lot of pumps priming the housing bubble over a long period of time. Who listened to the bears?

Anonymous said...

"There was a surge of housing prices right after WW II that matched what we saw in more recent years. But, that one was due to clear fundamentals, supply and demand conditions. There was a surge of demand from the returning vets ready to boom babies, while almost no housing had been built for about 15 years. Otherwise, according to Shiller, most of the time the price of housing has risen pretty closely in lock step with real incomes."

Leaving aside your example of returning vets, and price increases due to supply/demand imbalances generally:

I am not sure why this is not an argument that milk is priced correctly because a gallon of milk costs exactly twice what it costs to purchase a half gallon.

If the prices of homes are rising as "real" income is rising, what is the point of rising real income?

We get to one of two possible explanations:

1. Money is being deliberately depreciated - the Austrian view

2. Something, other than depreciating currency, which is causing real income to rise, is also causing home prices to rise.

What other explanation than the Austrian can economists offer?

Anonymous said...

Part two, reply to Rosser:

Now this other thing, which does not seek to explain the problem by resort to monetary causes, also has to take into account that that ratio of home prices to the average average hourly wage has doubled between 1964 and 2006.

I would offer that both conditions could be filled if the additional hours of work which must be performed to purchase a home added nothing to the fundamental value of that home, but added to the cost of producing that home - that the additional hours of work are superfluous to the value of the home.

Based on this, we can conclude that the rise in homes prices more or less track the rise in incomes because both reflect the addition of superfluous work to an economy as a result of Washington's policy.

We can further conclude that this also implies the depreciation of the currency, as the extension of cheap credit becomes the policy tool to encourage what Keynes called wasteful and unnecessary investment.

Mark A. Sadowski said...

"But it is hard to identify such a displacement for housing in 1998."

First, the only reason why people can't identify when the bubble started to inflate is because they don't bother looking at data. Unfortunately there are a lot of data free pontificating economic ideologues everywhere these days. Clearly housing prices started to deviate from trend (0% real growth) in 1998, all you need is to do is look it up. I would also point to Shiller's data on historical real housing prices at:

Second, once you identify the starting date it get much easier to notice a major change in policy that took place the previous year: the Taxpayer Relief Act of 1997. (I don't think The Trucker knows how right he is.) This act dramatically increased the real estate capital gains exclusion, so that few ordinary people have had to pay real estate capital gains taxes ever since. More importantly it extended real estate tax preferences to second homes (including the capital gains exclusion just by declaring it your "primary residence") for the very first time. Before this act became law flipping houses wasn't the national pastime that it has since become.

While everybody is busy pointing at this that or the other cause the most obvious one, the one that was actually present at the scene of the crime, is getting off absolutely scot free.

P.S. And let's face it, the real estate lobby doesn't want anyone to notice.

James said...

Brenda Rosser said...
"It would be useful to know (both in the case of Henry CK Liu and 'James' and others) where the data came from."

All you had to do was follow the link to my housing graphs and then scroll down to the bottom of the page. Here's what it says:

Data sources and methodology:

* Latest quarterly, median, existing, single-family home price provided by the National Association of Realtors.
* Trailing house price index data provided by Standard & Poors (1987-Present), the Federal Housing Finance Agency (1975-1986), and Freddie Mac (1970-1974).
* Inflation data provided by the Federal Reserve Bank of Cleveland (1977-Present) and the Bureau of Labor Statistics (1970-1977).

The chart on this page estimates the market value of today's median-priced house over time. The trailing nominal prices are derived by taking the recent median price of existing single-family homes, as reported by the National Association of Realtors, and discounting it by the S&P/Case-Shiller Home Price Index. From 1975 through 1986, the FHFA House Price Index is used. From 1970 through 1974, the Freddie Mac Conventional Mortgage Home Price Index is used. The S&P/Case-Shiller HPI, FHFA HPI, and Freddie Mac CMHPI are "constant quality" indices, so even though houses are built larger today than they were many years ago, this graph automatically adjusts for this variation. The trailing inflation-adjusted prices are then derived by adjusting the nominal prices by the CPI-U Research Series Using Current Methods. Prior to Q4 1977, the CPI - All Items Less Shelter is used.

My housing graphs are currently one quarter out-of-date, because I've been slow about updating them. I provide spreadsheets with all my data. I have placed my graphs and spreadsheets in the public domain, so you are free to copy them.

By the way, if anyone's interested, I have an entire blog dedicated to tracking the housing bubble. It's at said...


Actually your argument leads to the conclusion that tax policy has been less important, as the tax gain from the mortgage interest deduction became worth less with declining top marginal income tax rates. Of course, Mark Sadowski and Trucker emphasizew the 1997 tax policy change, which may well have provided a, or the, trigger. I do not know, but will not say it was not a factor.


Please keep in mind that the housing price bubble was a relative price change, not a general devaluation of the currency. It was a rise in the price of housing beginning around 1998 above the rate of increase in incomes, rents (which probably reflect most accurately the underlying state of supply and demand in the market, and indeed the price to rent ratio did not go up in the late 1940s, both prices and rents rose as the housing market was in a clear shortage condition), as well as above the costs of building a house, which I did not disuss in the post, but is discussed in some of the sources I linked to and is also discussed in the authoritative Chapter 2 of the second edition of Robert Shiller's Irrational Exuberance (2005). This means that a rather large amount of your argument is misdirected.

Let me address the more serious issue of what the Austrian position is here. I am perfectly willing to accept that lower interest rates due to overly loose monetary policies can aggravate bubbles, although it is not clear why there should be a particular stimulus to a particular sector's price increases due to this in general, although it is reasonable in the case of housing, given its greater reliance on long term borrowing through mortgages adn the higher proportion of costs that were due to borrowing. Indeed, some of the last holdouts who argued in 2005 that there was not a bubble pointed to the low interest rates to justify the ludicrously high price-to-income and price-to-rent ratios (above anything ever observed) that were going on.

I am friendlier to Austrian analysis than most on this blog. However, I do think that bubbles are a phenomenon that the Austrians really have a hard time getting their analysis around. Maybe overly low interest rates can explain a bubble in housing because of the role of borrowing costs, but they do not explain bubbles in stocks or commodities, many of which we have seen. Austrians have a preference for saying that "markets mostly work and prices send good information signals," but bubbles mess that story up pretty badly.

OTOH, I will note that the great defender of Hayek, Greg Ransom, has argued that Hayek recognized that bubbles could happen. Nevertheless, the tendency on the part of most Austrians to explain them is to focus on interest rates, and as I have just argued, that is not a fully satisfactory general explanation, quite far from it.

Ken Houghton said...

I'm with James et al. on ca. 2001 becoming the real Bubblicious part of the rise.

The 1998 beginning was, as Trucker obliquely notes, driven by the WJC-approved-and-urged change in the tax code. But the effect of that should have been relatively small--though outsized in a measure such as C-S.

Putting it simply, if my family has a $300K appreciation on our house in 1997, we don't sell if we can delay it. But to have an appreciation of at least $250K (we can agree that the effect of the change starts there and continues up, though it is reduced as a percent of sale price, right?), especially net of improvements, you have to have been sitting on that "cash" for a very long time or be in a hyperinflated area. Or both.

So we see sales of houses in the $350-600K-and-up range happening in 1998-1999 for tax reasons. And that pushes the median sale prices up, and affects C-S. So you see what looks like the beginning of a bubble.

What keeps it going is that it actually becomes a bubble: and that really doesn't happen until late 2000-early 2001. And it doesn't take off until the jobless recovery of 2001 et seq.

Note that none of the requires blaming the Bush Administration at all. (The jobless recovery part is open to discussion, though less so as BarryO's people appear ready to repeat that stunt.)

Unusual growth in any sector is not, in itself, unusual, whether you want to call it "variance from equilibrium" or "speculation." It's when it becomes sustained and self-fulfilling that it becomes a true "bubble" that becomes worth writing papers about.

James said...

Brenda, I should clarify that when I noticed the housing bubble in spring 2001 I did not yet know about the various housing indexes. I made my judgment based on news reports of sustained above-average price appreciation, just as I had regarding the stock bubble in the late 1990s. By early 2002 there was substantial discussion in the financial press regarding the possibility of a housing bubble. I never expected that it would last as long as it did.

James' Law: If people are debating whether or not there is a bubble, then there probably is one. said...


I shall simply note that maybe the tax change triggered it and maybe it did not. There is no way to know. After all, giving the Austrians a chance to salvage themselves here, maybe it was the very low interest rates that were in place at the end of 1998 after the Russia-LTCM crisis, as I think I already mentioned. Or, maybe it was both of them together! Heck, my wife and I refied our mortgage in late 1998 on the bet that those were exceptionally low rates.


There is no answer as to how many people have to be noticing before one can call it a bubble. Certainly if a price deviation above fundamentals remains so small that nobody notices, then it is not a bubble. But, if it does get big enough to be noticed, I would say that the question of "when did the bubble begin?" is not answered by "when did people notice it," but by when the price movement that would continue to be sustained begin.

This may seem to avoid the point, but let me note that when people notice it depends on what else is going on, which is pretty arbitrary. People noticed the housing bubble after the much more dramatic stock market bubble crashed. If there had been no stock market bubble, might not people have noticed the one in housing a bit sooner?

Shag from Brookline said...

Barkely, with respect to the influence of tax policy on the bubble, perhaps behavioral economics might come into play. Consider the many unsophisticated renters all of a sudden having the opportunity for income tax deductions for property tax and mortgage interest deductions. Granted, many of them may not have analyzed with care how meaningful - or meaningless - those deductions would be in their low tax brackets. But they might have felt like the "big boys" who for years had been getting tax deductions. My point is that there were a number of pumps, including tax policy, that were priming the bubble over a long period of time. Go back to the late years of Reagan when many unsophisticated investors bought condo units heavily mortgaged as investments, not to reside in, that were soon under water. A few years later, the condo market perked up again. So a little air was depleted, but soon the pumps were working again. There is a lot of marketing that takes place with these unsophisticates that you and I wouldn't swallow. But like prescription medicines ballyhooed on TV, there were many prepared to swallow. Don't you think that there were more unsophisticated than sophisticated purchasers of homes?

James said...


I think you completely misunderstand the points I was trying to make.

My first point: The people who claim the bubble began in 2003-2004 are clearly wrong. Many people, including me, noticed the bubble prior to 2003. We would have to have a superhuman predictive ability to discover the largest housing bubble in U.S. history before it even existed.

My second point: The debate over whether the bubble began in 1998 or 2001 is not a debate about a phenomenon. It is a debate over a definition.

When people use the word "bubble", they generally mean a substantial overvaluation of a particular asset class. Home prices were not overvalued in 1998. In that sense, there was no bubble in 1998. Home prices were overvalued in 2001. In that sense, there was a bubble in 2001. 1998, however, was the year that price increases began their above-average rate of return, which led to prices surpassing their inflation-adjusted 1989 peak in Q1 2000. (See my spreadsheet for the data.)

So, when did the bubble "begin"? Did it begin in 1998 when prices were fairly valued, but the rate of increase accelerated? Or, did it begin in 2000 when inflation-adjusted prices surpassed their previous peak, suggesting mild overvaluation. (After all, nobody refers to the late 1980's boom as a bubble.) Or did it begin in 2001 when real housing prices were clearly out of whack with historical norms?

Again, you're arguing about a definition. It's a stupid argument. Rather than debate the definition of the "beginning" of the bubble, it makes much more sense to say, "The abnormally high rate of price increases started in 1998, and real housing prices were clearly out of line with historical norms by around 2000-2001."

Anonymous said...

Rosser: Thanks - you give me a lot to think about.

john c. halasz said...

CR analyzed the 1997 tax change a long time ago, and concluded it was not a major factor behind the housing bubble, though it might have had some ancillary effect. (Note: you have to compare the marginal differences in tax effects to the tax effects that would have been in effect otherwise, and those effects already advantaged home owners).

Barkley Rosser said...

Shag,I do not know the answer and do not know how at this point to get the answer. john c. halasz says that Calculated Risk studied it and found it not too significant.

john, do you have a link on that?


Glad to be providing food for thought.


Yes, there is a definitional difference here. As far as I am concerned, it is accurate to say that the bubble began in 1998.

There is one problem in your remarks. In fact what went on in the late 1980s was labeled a bubble, so presumably even if one wants things to get above some level befoe one says "now it is a bubble," that point was presumably reached some time before 2000. If you doubt that people called the late 1980s a housing bubble, go google "1980s housing bubble." There are plenty of hits, and I note that Shiller says that there was a bubble then, at least in some cities.

Kaleberg said...

Anonymous misses an important point. Very few people buy houses for cash. Most of them take out loans and make monthly payments. Prices were pretty stable after WWII with a mortgage on a median home costing a median worker about 600 hours a year. This started to rise in the 70s and soared over 1000 hours by the end of that decade. It settled at about 800 hours in the 90s and didn't start to rise again until 2005. (See

Bubbles are no different from any other investment, except that they don't provide a pay off at the end. The early investors do best. Then come the more aggressive ones. The middle investors get middling returns. Then, the poor suckers at the end lose their shirts, and they were the ones who accept conventional wisdom.

I tend to rely on a magic billboard on route 101 out here in rural Washington. Whenever it starts touting an investment opportunity out here in the sticks, it is time to sell out ASAP. This is true for any investment, bubble or not. When they start reach out to meth country for buyers, there isn't much more money to be made.

john c, halasz said...

Sorry, no link. I read things in real time and what sticks in my head sticks, so not much for sourcing. I checked the search at CR, but it only goes back so far. (IIRC, he's changed blogging platforms a few times,so prolly why). It was 2 or 3 years ago that the issue came up IIRC. If you'd want to pursue it further, you could try e-mailing CR, since he brings up and seems to remember his own posts fairly religiously.

john c. halasz said...

O.K. Tried again and found this:

Though I do recall CR discussing the ins-and-outs of the tax issue in more detail.

john c. halasz said...

Nope. Couldn't find what I remembered. But there also this:

TheTrucker said...

John c, halasz

I have no idea who or what this "CR" might be, but I beg to differ with any analysis that would leave the effects of a zero capital gains tax out of the housing bubble causation equation. Prior to 1997 people INVESTED in homes as retirement vehicles and they were tax advantaged in doing so because of mortgage interest deductibility. And they could "trade up" to a larger or more expensive home without incurring a capital gains tax. Then at age 55 they were granted a one time exemption to move out of the kid ranch into a smaller retirement home.

In 1997 we had the lure of the NASDAQ casino and Joe sold the house to a house speculator and gambled up big in the stock market with the new tax rates on that also (capital gains on one year holding of stocks were cut to 10%).

My own opinion is that the 1997 tax act launched BOTH bubbles. Bush did not launch the bubbles. But in early 2002 his big initiative was home ownership. And he never let up.

"This legislation complements the President’s aggressive housing agenda announced in 2002 to dismantle the barriers to homeownership."

Bush the Bartender

But what does this have to do with "economics". It looks like standard carnival Republicanism to me. How does this link into Keynes VS Friedman?

TheTrucker said...

For anonymous and the stuff about "superfluous" work and such. And for just about all of us who use the term "real" income (like inflation adjusted).

The hours of labor necessary to secure ones retirement home is to me "real" economics and the phrase "real income" is the stuff I can put in my savings account. I agree with Henry George and Michael Hudson on this deal. Land rent is what causes the "real" increase in the cost of real estate. The technology gets better, the productivity increases and the labor costs of the home decrease. What rises is the population and the land does not grow along with it. Land increases in value generally because of population growth but it also increases in value due to clumping around the capital means of production (the burbs).

Shag from Brookline said...

Kaleberg provides a nice summary:

"Bubbles are no different from any other investment, except that they don't provide a pay off at the end. The early investors do best. Then come the more aggressive ones. The middle investors get middling returns. Then, the poor suckers at the end lose their shirts, and they were the ones who accept conventional wisdom."

Why, that sounds a lot like a Ponzi scheme variation.

As for the "billboard" comment, it reminds me of why in the '90s I dreaded attending house parties where the bulk of the conversation dealt with "how much the value of my home and other homes in the neighborhood have been increasing" with everyone seeking to top the others. No, these house parties did not include Summers, Bernanke, Geitner, Rubin, Friedman, Greenspan, Krugman, or other renowned economists. We were all so wise with our purchases of our homes years before the prices rose sharply. Many commented "I could not afford to buy my house at today's prices." It was actually boring, even more boring that golf talk. Here on the East Coast we enjoyed the Californiation taking place.

Barkley Rosser said...


The case can be made that the tax code changed either triggered or at least played a role in the housing bubble (whenever one wants to say it started), but I do not see it playing much role in the stock market one, which was already ripping along pretty well by then.

"CR" is Calculated Risk, which I never read unless I am linked to it once in awhile. But according to the Gongol EconDirectory, in August it had more page views than any other economics blog, and by a heft margin. We were #59, which was up from July when were around 67th or so. I did not go to to the bottom of Brian's list, but he think he tracks around 200 of them or so.


Plenty of famous economists make stupid investments and lose money, and even occasionally, their shirts. Hey, one of the old lines thrown at economists is "if you are so smart, why aren't you rich," not to mention that many of us are notorious for not being good at balancing our checkbooks, or whatever they call those things these days... :-).

Jack said...

Economists don't get rich mearly by being well read in economic theory. The road to riches, even for economists, lies in either political roots ie Pete Peterson, Henry Kissinger, Phil Gramm, etc. or political/economic influence ie Boldman Sachs et al. If you happen to be an economist that is almost incidental, though it may be good for image purposes.

Shag from Brookline said...

My semi-retirement started in the fall of 1998. To keep active, I audited courses at a nearby university at very low senior citizen cost. The students in their late teens and early 20s seemed most comfortable and secure. The economy was good, the job market was good. These students had a lot to look forward to.

Occasionally articles would appear about the great wealth my generation would soon be passing on to our children and grandchildren, perhaps the last great transfer of wealth because of the large number of the just younger babyboomers generation. Federal estate taxes at the time would take a big bite of such inheritances without careful estate planning. Many of my generation would be passing on low tax basis assets, in particular securities and real estate held onto for decades. Stepped-up tax bases upon death would avoid capital gains taxes, although the estate tax might take a big bite.

Then Bush/Cheney came along in 2001 with significant tax cuts, including with the estate tax. So the situation got rosier. But then came the bubble, 9/11, followed by so much else to the current financial crises of last year that continues with Obama/Biden. Things are not so rosy anymore not only for college students, but the great wealth passage from my generation will be lessened.

Perhaps my semi-retirement in 1998 was when the housing bubble began. Mea culpa. said...


Another way that economists can make money is by writing a good selling Principles textbook. I do not know the exact nature of their personal portfolios, but both Bernanke and Krugman have done this, and I suspect that this may be a bigger factor in their wealth than many other items. Fec Chairman are paid well, but are not in the same league at all as Wall Street CEOs. Indeed, the pull of Wall Street is a main reason why we almost never see Fed governors serving a full 14 year term.

Shag from Brookline said...

"Another way that economists can make money is by writing a good selling Principles textbook."

Does "good selling Priniciples textbook" necessarily require that it be well written? If not, do any examples come to mind?

Jack said...

That would be an honest way for any academic to become wealthy, and as such it is limited to a very few in each field. It also takes genuine intellect and the respect of their academic discipline. The big money is in shilling for the banking community, especially if one is looking for an endowed chair or a seat or two on a corporate board.

Myrtle Blackwood said...

I'm trying to track loose monetary policy - that related to asset price inflation ... ergh, 'permanent bubble' post mid 1960s. Some relevant texts:

"For the 18 years (August 11, 1987 to January 31, 2006) of his tenure as chairman of the Fed, Alan Greenspan repeatedly bought off the collapse of one debt bubble with a bigger debt bubble. During that time, inflation was under 2% in only two years, 1998 and 2002, both times not caused by Fed policy. Paul Volcker, who served as Fed chairman from August 1979 to August 1987, had to raise both the fed funds rate and the discount to 20% to fight hyperinflation of 18% in 1980 back down to 3.66% in 1987, the year Greenspan took over the Fed just before the October 1987 crash, when inflation rose to 4.53%....The sharp rise of prices for assets and commodities around the world has been caused by the sinking of the purchasing power of all currencies....[central banks are] holding up inflated asset and commodities prices globally with loose monetary policies....."

A failure of central banking By Henry C K Liu. 30th January 2008

Myrtle Blackwood said...

And: "These 1990s "retail" sweep programs are not to be confused with the sweep programs initiated by banks during the 1960s and 1970s. In those programs, business demand deposits were swept overnight (typically) into non-deposit interest-earning assets such as repurchase agreements and money market mutual funds. Although these programs also reduced banks' required reserves, their primary intent was to allow firms to earn interest overnight on demand deposits because, under the Banking Acts of 1933 and 1935, banks are prohibited from paying explicit interest on such deposits...."

Monthly Sweeps Data

1949 – Birth of Eurodollars

1945 – 1955. Europe’s capital markets remained largely closed to international capital flows. The US dollar was stable and other currencies were weak.
Exchange controls in Europe were heavy. This combination discouraged speculation.

1950s – Growing concentration in international trade and investments leads to a small number of networks from which impressions and advice is received. This leads to a ‘common tilt’ in multinational corporations decisions and processes that courts instability in the global economy.

1955 – European nations make their currencies convertible to the US dollar (defacto) in response to pressure from the US.

1958 – Currency convertibility of European currencies announced formally. “The [global economic] system begins to sputter after 1958….”

Late 1950s – The Euromarket emerged. . This new capital market entailed the free flow of U.S. dollar- denominated assets without supervision or control by any national government. It expanded substantially over the following three decades. The US and the UK rescinded capital controls on short-term capital flows. Other countries were compelled to rescind their own capital controls because they became too costly to sustain; especially in the light of the rapid growth of multinational corporations (MNCs). MNCs could simply avoid controls by borrowing and lending through foreign affiliates in the Euromarket. MNCs could also shift operations to other countries with looser restrictions so as to preserve their competitiveness. Countries that tried to retain tight controls faced capital outflows and a consequent loss of investment, employment and income.

1960 – The US gold pledge weakened under pressure of the dollar overhang, leading promptly to speculation in the London gold market during the 1960 US presidential election. The volume of hot money circulating in the world’s money markets was increasing.

1964 – The exchange rate for sterling (one pound = $US2.80) became obsolete.

1967 – The British Pound was the first currency to succumb to international speculation.
1990s – a different distribution of risks towards global institution investors, mainly pension funds, in the advanced capital and debt markets.

Myrtle Blackwood said...

Again, this is when I leave off on the large questions that come up in economics.

"When did the housing bubble begin?"

This is a mighty trap for someone like me, who's trying to collate the history of monetary disorder (post WW II).

I don't have the time to try and put this together right now.

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