Casey Mulligan Returns to Strange Argument Against Housing Bubble
As long as New York Times Economix contributor and University of Chicago Professor Casey Mulligan continues to insist that the housing bubble was not a bubble, but a “historically unusual housing boom,” I will be here to rebut him. Here he is today with a more fleshed-out version of yesterday’s argument. I’ll respond, point by point.
Following an exposition, Mulligan delves deeper into two reasons that the precipitous rise in housing prices — commonly termed “the bubble” — might have been nothing but an efficient and legitimate boom. First, he says that Americans needed more room for their stuff, and therefore wanted bigger houses:
An extraordinary population growth rate would be good reason to build houses at a faster pace and would cause prices of housing to increase for occupants. Yet the human population of the United States grew at about the same rate between 1995 and 2005 that it did between 1980 and 1995 (about 1 percent per year during both periods, although the total pounds of humans have probably grown more in the recent period).But let’s not forget about the non-humans in our homes — the stuff! Consumer durable statistics from the Bureau of Economic Analysis confirm the obvious: From 1995 to 2005, ownership of furnishings and appliances increased at a rate of 4.5 percent per person per year (as compared to 2.2 percent in the earlier period), and ownership of recreational goods rose 9.1 percent per person per year (as compared with 5.4 percent earlier).
In case you still doubt that Americans have genuinely increased their demand for space, note that the self-storage industry has more than doubled its share of the national economy since 1995, according to employment data from the Bureau of Labor Statistics.
This is nonsensical for two reasons. First, he says that many housing-bubble believers — that is, just about everybody — do not take into account that up through 2007 Americans accumulated more stuff and therefore desired bigger houses, contributing legitimately to increased demand for homes and increased prices. That is not true. Many housing-bubble believers do think that Americans wanted bigger homes. But they believe that easy money and an unrealistic expectation that housing prices would never decline led them to bid up the price on homes irrationally.
Second, and more theoretically, just because Americans purchase more things, it does not mean that they *own *them and need a place to store them — Mulligan does not show that just because Americans had more stuff they all decided to move into bigger houses. Indeed, the volume of American trash has grown in concert with the volume of American stuff and the size and cost of American homes — meaning Americans were throwing out record amounts of junk at the same time they were, say, putting no money down on a $589,000 terraced two-bedroom on the outskirts of Las Vegas.
I’m not sure why Mulligan believes that there is a strong, direct and provable correlation between volume of stuff and price of houses. Similarly, Mulligan does not explain the connection — possibly because there is not one — between employment growth in the self-storage industry and demand for square footage of housing.
Next, he argues that information technology will reduce ownership costs and make the market more efficient — and says that it “reinforces the increased demand for space.”
Information technology will likely reduce home ownership costs — shrink the “real estate, mortgage industry employees, and other intermediate inputs” and “compensation of employees” pieces of the pie — but for now we cannot be sure exactly when and how much.
House shopping began an ongoing transformation over the past several years, with shoppers able to take spectacular virtual tours of properties. Arguably information technology will someday enable most home shoppers to do without a human real estate agent, and this would be a significant cost savings for home sellers. Don’t forget that a home is built once but typically sold many times, with each sale creating a fee for real estate agents, and many of the sales involving a vacancy period during which no one gets value from the structure.
Market participants might have also hoped that mortgage loan screening could improve, and become less labor intensive, thanks to information technology….
I agree with him on this point but am not sure what this means within the context of his broader argument. It seems to me that technological innovations that reduced the cost of purchasing a home before 2005 further demonstrate that skyrocketing home prices were irrational and driven by frothy exuberance.
And, as always, if Mulligan wishes to argue that the housing bubble was nothing but an efficient housing boom, I am happy to hear him out if he grapples seriously with the issues of low interest rates, no-money-down mortgages, fantastic overbuilding and lax credit.