rssA Strange Argument Against the Housing Bubble
Tuesday, May 11, 2010 at 3:19 pm
- 27 Comments
University of Chicago economist and New York Times Economix contributor Casey Mulligan does not really believe there was a housing bubble. He has written a number of perplexing blog posts to back up his case. And now: this.
Mulligan writes: “Housing bubble theorists will offer you a list of reasons why it might have been appropriate to have a bit of a housing boom, and then (perhaps correctly) show you that the factors on their list are not big enough to explain all of the housing boom we actually experienced. The final step in their argument is to attribute all of the unexplained part of the housing boom to irrational exuberance. Of course, the entire argument falls apart if their list is incomplete. For example, do those lists include this?”
He then includes a chart of employment in the self-storage industry, peaking out at 0.035 percent of workers, or around 51,000 people.
He argues that identifying a bubble is fundamentally a process of subtraction: Take a look at skyrocketing asset prices, take away price increases explained by legitimate demand and there is your bubble in the irrational and frothy leftover. Next, he argues that “housing-bubble theorists” (virtually all economists and, well, virtually all Americans) fail to recognize that Americans had more stuff, and therefore wanted more closet space and storage units, and therefore needed to move into bigger and bigger houses — explaining housing price increases and weakening the case that a housing bubble ever really happened.
This is imbecilic. First of all, many of us “housing-bubble theorists” do argue that Americans legitimately wanted bigger houses to put all of their junk in, contributing to real upward pressure on housing prices. But we also believe that a number of other important economic factors — a decade of cheap credit, lax lending standards, fraud in the mortgage industry, the rise of variable-rate mortgages, big banks’ demand for housing assets to securitize and a monolithic belief that housing prices would not fall chief among them — do explain the bubble, the divorcing of asset prices from economic reality. “Housing-bubble theorists” don’t need to know anything about employment in the storage-unit business to make the puzzle pieces fit together.
Second, Mulligan fails to explain how employment in the self-storage industry is indicative of anything as far as housing goes. Wouldn’t dollars spent on self-storage, or square feet of self-storage, be better? Couldn’t closet and storage-unit demand be inversely correlated — in that if Americans had more storage units, they might not need so many closets?
Finally, if Mulligan really wants to theorize that the housing bubble was not a bubble, I am willing to hear him out. But rather than pointing to a chart of employment in the self-storage industry, I would like to see him explain how those strong economic factors — a decade of cheap credit, lax lending standards, fraud in the mortgage industry, the rise of variable-rate mortgages, big banks’ demand for housing assets to securitize and a monolithic belief that housing prices would not fall, again, for instance — did not distort the market and blow the bubble up.
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27 Comments
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Comment posted May 11, 2010 @ 7:40 pm
I came up with a little theory as to why the bubble started.
http://liberaldefenderoffreedom.blogspot.com/20…
It all boils down to the bubble starting shortly after The Taxpayer Relief Act of 1997 was passed which allowed for profits of home sales to be tax free at levels of 250k for individuals and 500k to couples. At least that's the only reason for the sudden increase and continuous steep increase in home prices shortly after.
What happened in the end was a bunch of Wall Street buffoons going bonkers.
If you can come up with a better theory, be my guest. :)
Comment posted May 11, 2010 @ 8:18 pm
Wrongo. This bubble did not begin until 2003. That is why everyone started to foreclose in 2007/2008. Otherwise, we would have had all these foreclosures in 2001/2002 if you're right. The sub prime took off, again, in 2002. Read about it. After it tanked in the 1990's.
Comment posted May 11, 2010 @ 8:30 pm
Just look at the chart. It's obvious that around 1998 home prices started to sky rocket. That's beginning of the bubble in home prices.
The sub-prime market came about to perpetuate the bubble after it ran out of viable home buyers as a video I linked to in that entry explains.
Pingback posted May 11, 2010 @ 9:31 pm
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Comment posted May 11, 2010 @ 8:35 pm
coming from the self storage industry, this is very interesting food for thought!
Comment posted May 11, 2010 @ 9:14 pm
Perhaps the self storage business remains stable because it's ultimately cheaper to store the contents of your foreclosed, vacated home for $50 a month rather than parting with all of your belongings or trying to fit them in your parents' garage.
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Comment posted May 12, 2010 @ 2:31 pm
What is odd about this is that self-storage– to real estate professionals– is seen as a placeholder business for real estate speculators. It has relatively little capital and operating costs, and can help defer the costs of a land purchase until a more attractive use comes along. You tend to find these places at the forefront of urban sprawl– in 5 years, the land is re-used housing subdivisions or office parks.
In other words, a jump in self-storage employees could be considered further evidence of a real-estate bubble. People didn't have that much more stuff, but lots of people built self-storage in anticipation of flipping that land later on.
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