July 28, 2005


Bubble babble (Alan Reynolds, July 28, 2005, Townhall)

Why is even the slightest rollback of asking prices on homes supposed to be such an ominous threat? The most revealing answer came from New York Times writer Anna Bernasek in "Hear a Pop? Watch Out." She began with a hypothetical wealth effect. "Economists use this rule of thumb: A $1 change in household wealth leads to a roughly 5-cent change in consumer spending. By that measure, a 10 percent decline in real estate prices would knock about half a percent off the gross domestic product."

This wealth effect results from single-entry bookkeeping -- looking only at sellers and ignoring buyers. The wealth of young couples mainly consists of their future earnings, or "human capital." High house prices reduce that wealth for first-time homebuyers by as much as they raise financial wealth for sellers.

Those trading one home for another are both buyers and sellers, so the net effect on their wealth depends on whether home prices are most inflated in the place where they are buying or selling. For those changing homes in the same area, a lower price on the house being sold would be largely offset by a lower price on the one being purchased, with little net wealth effect. If home prices softened sufficiently to make selling less attractive, then fewer people would put their homes on the market and the resulting scarcity would limit any price decline.

Bernasek went on to fret that "a fall in values ... would probably lead to tightened credit standards, less lending and higher interest rates." Yet her sources believe "the most attractive way for policy makers to cool the housing market would be to put pressure on lenders to tighten their credit standards" and for the Fed to "nudge the long end of the market toward higher rates." Their proposed solution is identical to the assumed problem.

Similarly, the Fed spent twenty years telling us that our budget deficits were causing them to keep interest rates high--even though rates fell consistently during throughout the 80s and 90s--so what happened when we went into surplus? They raised rates.

Posted by Orrin Judd at July 28, 2005 1:17 PM

just read that there are 15.9M empty housing units in the u.s., currently. and of course there are millions more being constructed now. the correction has already begun.

Posted by: cjm at July 28, 2005 4:37 PM

There're in the wrong places.

Posted by: ghoscat at July 28, 2005 6:43 PM

cjm: In 2000, there were 116 million housing units in the US, of which 10 million were vacant. 34% were vacant because they were seasonal, recreational or occasional housing, a category that everyone agrees has been growing fast. In June of 2000, housing starts were running at about 1.5 million units annually. In June of 2005, housing starts were running at about 2.0 million units annually. 16 million unoccupied units is a little high, but not far off what you would expect.

Posted by: David Cohen at July 28, 2005 9:59 PM

The Census Bureau has the second quarter housing numbers out for 2005. "National vacancy rates in the second quarter 2005 were 9.8 percent for rental housing and 1.8 percent for homeowner housing, the Department of Commerce Census Bureau announced today. The Census Bureau said the rental vacancy rate was not different from the second quarter rate last year (10.2 percent) or the rate last quarter (10.1 percent)." PDF Report

"Among regions, the rental vacancy rates for the current quarter were highest in the Midwest, (12.6 percent) and South (11.8 percent), although they were not different from each other. Rental vacancy rates were lower in the West (7.5 percent) with the lowest rate being in the Northeast (6.1 percent)."

"There were an estimated 123.7 million housing units in the United States in the second quarter 2005. Approximately 107.9 million housing units were occupied: 74.0 million by owners and 33.9 million by renters. Of the 15.9 million vacant housing units, 12.0 million were for year-round use. Approximately 3.7 million of the year-round vacant units were for rent, 1.4 million were for sale only, and the remaining 6.9 million units were vacant for a variety of other reasons."

Posted by: cjm at July 29, 2005 2:10 AM

cjm: you'd expect the rate to be higher here for two reasons. First, Americans move often; second, we're in a still-unfinished migration from the north and east to the south and west. If you've got time see if you can find some region-by-region numbers for homeowner housing. I'll bet the low rental vacancy rate in the Northeast goes along with a relatively high homeowner rate.

Posted by: Dread Pirate Roberts at July 29, 2005 1:27 PM

Why would anyone rent when you can buy at roughly the same cost?

Posted by: oj at July 29, 2005 3:12 PM

because in some parts of the country, rents have fallen while prices to buy have sky rocketed. ultimately, rent and price are connected. when they become disconnected, a correction is inevitable.

the parts of the country that initially took off, have provided finacing for speculation in other parts of the country. for example, people in socal take money out of their homes and use it to buy houses in phoneix and las vegas, driving up the prices there.

some speculators have been buying properties 5 and 10 at a time. this has the effect of increasing the supply of rental properties, driving down the rates.

joe: most of the north east hasn't experienced huge increases in home pricing because of the high property tax rates there. therefore there rental market hasn't been so distorted. in the west and south there are huge amounts of building going on without commensurate increases in population. speculators buy the new properties and put them on the rental market, increasing the empty percentage.

i don't see this as a doom and gloom situation, just a repeat of the dotcom kerfuffle. if you haven't been playing with fire, you won't get burned.

Posted by: cjm at July 29, 2005 3:31 PM


Rent and own can only be that intimately connected if they're identical, no? Which means that in addition to the lower rent you'd have to be able to sock away enough in another investment to recoup the same equity down the road? And even that ignores the human drive to own a home of one's own.

Posted by: oj at July 29, 2005 3:52 PM

oj, i am not sure i get your point. i agree that on the whole people prefer to own rather than rent, upto a point. if the price to own gets too far out front of the cost of renting then they do as you say, they take the difference and invest it. coincidentally the stock market is now taking off :)
this situation is all about timing, some people are selling out and waiting for prices to drop so they can buy back in.

Posted by: cjm at July 29, 2005 4:41 PM

cjm: where I am (Colorado Springs) we're seeing the construction and the population.

Posted by: joe shropshire at July 29, 2005 6:23 PM

joe: what are prices doing there ? i know the denver market is static, and foreclosures are up. prices in denver seem to be about the same as when i left 3 years ago. what is the colo springs economy like ? the hippy in me really likes manitou springs :)

Posted by: cjm at July 29, 2005 6:33 PM


Find me someone who does that.

Posted by: oj at July 29, 2005 8:18 PM


do a "find" on "now renting", the reference is about half-way down the page.

this is the site i get housing bubble information from:


oj, is this an upsetting topic for you ? if so i won't bring it up again.

Posted by: cjm at July 29, 2005 10:15 PM


No, I don't care. Our house has toi be offered back to dartmouth College--we don't get any appreciation.

I just find it delusional that people think we can add 200 million people over the rest of this half century without building millions more houses.

Posted by: oj at July 29, 2005 11:03 PM

there are less people in montana now, than in 1900, what do you think that does to property values ? massachusets is losing population. the atlas entry for new hampshire, is pretty much unchanged from 1960. california on the other hand has tripled in population in the same period. my house has doubled in value in 3 years, from an already high starting point. florida's population is exploding. it's all about location. think alaska is going to catch a big chunk of those 200m newcomers ? then buy property in siberia, because it's even more temperate there.

the reason i think there is a speculative bubble in real estate, right now, is because prices have far outstripped incomes. in the bay area, something like only 6% of the population can afford a house based on their salaries, think that is sustainable ?

we won't haved to wait long to find out who is delusional on this point...

Posted by: cjm at July 30, 2005 12:11 AM

The problem, Orrin, is that you're attempting to apply a long term, national trend line to a short term, regional situation.

Will demand for housing remain strong, nationally ?


Does that mean that every state and town in America will see strong appreciation ?


Will there be locations that, in fifty years, will have LOWER real valuations for real estate, despite national population growth ?


Is it possible that, in some states and urban areas, the current valuations have gotten ahead of sustainability ?

There is no doubt whatsoever.

Posted by: Michael Herdegen at July 30, 2005 2:43 AM


Yes, the housing market will remain strong nationally for decades.

Individual houses may vary.

Posted by: oj at July 30, 2005 7:20 AM

oj, that article made me laugh, it was like a little kid pretending to be a grown up. just move the southern border of nh into ma a little and poof! all of your new people will already be there.

Posted by: cjm at July 30, 2005 11:05 AM

Except that they're moving here.

Posted by: oj at July 30, 2005 12:46 PM

from massachusets which has a net loss of population, currently. this is called "zero sum"; for every house added to nh one becomes empty in ma.

will people still clamor to come here, once their home countries become essentially the same as the u.s. ?

while it is easy to extrapolate today out to forever, it isn't particularly useful.

Posted by: cjm at July 30, 2005 2:14 PM

Yes, the housing market will remain strong nationally for decades.

Individual houses may vary.

Thus, national "froth", regional and local bubbles, which will have some negative national impact when they deflate.

Posted by: Michael Herdegen at July 30, 2005 2:47 PM

As the others inflate--meaning you won't notice.

Posted by: oj at July 30, 2005 3:14 PM


They never will.

Posted by: oj at July 30, 2005 3:15 PM

why do you say that ? the trend worldwide is of increasing prosperity, with the possible exception of Africa. i see population flows as tidal with groups moving around, back and forth. parents used to admonish their children to clean their plates because of the hungry children in europe. but still you may have a point in that America is by far the most free country existant, and that alone may be enough to act as a permanent draw. perhaps the solution to the real estate issue is to allow other parts of the world to become part of the U.S.

Posted by: cjm at July 30, 2005 4:22 PM

For the most part they're likely to follow the Euro-Japanese track; aping our economics and politics can bring them affluence, but lacking our religious basis they'll just die off somewhat comfortably.

Posted by: oj at July 30, 2005 4:28 PM

or become Christian nations. just read that in the PRC the communist party now has fewer members than Christians. there can be only one.

Posted by: cjm at July 30, 2005 5:26 PM


Yes, that affords China its best prospect for a decent future.

Posted by: oj at July 30, 2005 5:30 PM
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