From the San Francisco Fed. Pointer from Mark Thoma.
II mostly wanted to keep this link for future reference. It charts some key housing market indicators before and after 2008. One bit of text:
The price-to-rent ratio (red line) reached an all-time high in early 2006, marking the apex of the housing bubble. Currently, the price-to-rent ratio is about 25% below the bubble peak.
My reading of the charts is that after the bubble burst, housing construction really fell off. The result has been an increase in rents, which in turn justifies an increase in house prices. You can argue about how much overbuilding there was prior to 2007 and how much underbuilding there has been since. I doubt that one can give a definitive answer. The problem is that I do not think that anyone can say what the “right” amount of average housing space per person is. And we are in the midst of trend increases in urban and outer suburban population, and I do not know how that affects things.
My textbook says prices go down when there is an oversupply. I think the only reasonable question is how undersupplied housing was before 2007.
http://idiosyncraticwhisk.blogspot.com/2015/11/housing-series-part-85-housing-prices.html
Your textbook also says that vacancy rates should drop with under supply, and that growth should slow with slowing demand growth, and that as prices (costs) rise for a good people should consume less of it. An under supply model in major cities doesn’t explain why overbuilding (evidenced by rising vacancy rates and record rate of new units per new household formation) happens outside of cities happens simultaneously.
In my view your (excellent) series on the housing issues highlight that the bubble was very complex and the specific outcomes are not in line with the standard narrative, but it doesn’t specifically attack the idea of a “bubble”.
Good points, baconbacon, and I probably need to be careful not to overstate my point. But what the data do make clear is that there was no relationship between building and prices. Building happened where prices were low. The FRBSF letter is based on a model that specifically rejects rational expectations because rational expectations would have rents and prices rising together. They rejected RE because it describes reality and they don’t realize that.
Agreed.
I was overly optimistic this summer, but after Thanksgiving passes I should have some free time if you still want my help with your book.
Just as long as I don’t have to read “All the Devils are here” . . .. shudder
Ha! I’ve got a lot of reading to do myself. As far as I can tell, though, all those books either reason from a price change (attribute outcomes to lending supply that are really outcomes that are a product of high prices from any cause) or attribute banking excesses to loose monetary policy with anecdotal evidence that all happened when the Fed Funds Rate was pegged at 5.25% and the yield curve was inverted.
OK, I am just going to say it.
This is exactly the Austrian story of misallocation of resources. It is usually read as overallocation of resources (which is or can be a part of it) with an emphasis on “boom” and “bust”, but the story works just as well with an appropriate level of aggregate spending/investment but inappropriate location.
Where’s the misallocation? Landlords, workers, and firms in closed access cities are doing just fine.
If the government said there could be no more drilling for petroleum, would it be an Austrian story if everyone started piling money into inefficient wind farms and ethanol plants?
That sounds more like real business cycle theory.
However, with something as big as housing (or energy) what if such restriction started raising prices and those increased prices began to be monetized by The Fed and banks through the credit cycle? Houses started to become more like assets and that might have perverted the supply and demand curve because as assets go up in price demand goes up, not to mention The Fed justifies not including assets in their inflation considerations.
So….maybe.
That could happen. But then wouldn’t non-shelter inflation be high?
If the Fed decided to keep pushing ngdp growth in the face of real shocks, then yes, you would expect poor investment choices elsewhere.
How?
So, what would the Minsky take be on the housing bubble?