Monday, August 24, 2009

Correcting two related housing bubble myths

A number of times I have heard journalists—who helped cheer-lead the housing bubble and who regard any price correction as a bad thing—falsely claim that the housing bubble began around 2003-2004. After all, that's when the bulk of the sub-prime lending began so that must be when the bubble began. A look at the inflation-adjusted data, however, shows that the bubble began growing in 1998 and we were clearly in mild bubble territory by 2000.

The extensive sub-prime lending that occurred in the middle of this decade was therefore a result of, not a cause of, the housing bubble. That said, the extensive sub-prime lending allowed the bubble to last longer and grow bigger than it otherwise would have.


In summary, the bubble did not begin in 2004 and sub-prime lending did not cause the bubble.

3 comments:

  1. ya mean this wasn't obvious?

    This is, of course, why I have been touting reversion to the mean, bell-shaped curves, 1998-ish prices, etc etc etc. I see no economic indicator - most relevant jobs and wages, and current deflation - to stop the curve from completion.

    Of course, "it's different here" is still played as a trump card!!

    ReplyDelete
  2. >A look at the inflation-adjusted data, however, shows that the bubble began growing in 1998 and we were clearly in mild bubble territory by 2000.<

    Only in hindsight.

    ReplyDelete
  3. kob said...
    "Only in hindsight."

    I spotted the bubble in spring 2001. We didn't need to wait for the decline to notice the bubble.

    ReplyDelete