A Strange Argument Against the Housing Bubble
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.