“The up? The down? The subsequent up?”Īnd yet, there are instances that feel like “bubbles” - Thaler cites the 2000s housing market - prompting quite a bit of effort between the two economists to define it. What even is a housing bubble?Īsk two Nobel Prize-winning economists, and the answer is blunt:“It’s impossible to know for sure whether something’s a bubble,” said Richard Thaler in a conversation with his colleague Eugene Fama. Whether prices will come down, stop appreciating, or this is a new normal in the price of homes depends on public policy choices that are in our control. There are fundamental problems in the housing market that have to be fixed and the solutions for them are relatively straightforward. In a way, it doesn’t really matter what we call it. And in everyday conversation, it appears to mean “prices have gone up a lot and I think they’re going to come crashing down again.” But there’s no agreed-upon economic definition for an asset bubble. The reason for this likely is that the most recent time the housing market attracted such universal attention, lots of people decided it was a bubble. For example, used car prices have skyrocketed nearly 50 percent over the last year, but very few people are asking if there’s a used car bubble. Prices rise and fall for assets all the time for a variety of reasons, so what makes something a bubble? Yes, housing is a scary place to see volatility (it’s the largest asset most of us will ever have), so part of this fascination with housing bubbles is people paying more attention than they might with other assets. It’s unsurprising, then, that the questions “are we in a housing bubble?” and “will the housing market crash?” saw a “tremendous increase” over the last 12 months, according to Google Search. And with America’s unemployment numbers still not where we want them and the unequal economic recovery from the pandemic, the fear of another crash looms. The last crisis, when a housing bubble and risky behavior by Wall Street took the blame for the Great Recession, looms large in our collective memories. And homeowners are riding high for now, exhaling sighs of relief that they made it into the exclusive club and eagerly watching their wealth skyrocket, worried about what might happen to change that. Would-be homeowners are furious as they lose bidding war after bidding war, looking for someone to blame as they watch their peers land a home and lock in a low mortgage rate. Renters at the lower end of the market have seen their rents rise in some places even as they’re more likely to be suffering the economic harms of the last year. You’d be forgiven for flashing back to the aughts but listen closer, that’s not Fearless playing, it’s Fearless (Taylor’s version). The Case-Shiller US National Home Price Index looks like a rocket ship launching into space. People are playing a lottery to see if they’ll win the honor of spending hundreds of thousands of dollars to build a home. “Bubble implies that it’s speculation that’s driving home prices high, and it really is the fundamentals of the market.”ĭemand is high, thanks partly to record-low interest rates, while the supply of homes for sale is at an all-time low.More than half of homes in the US are selling above list price. “I wouldn’t use the word ‘bubble,’ “ said Daryl Fairweather, chief economist at Redfin. Such increases are reminiscent of the housing bubble in the mid-2000s, when a combination of low interest rates and loose lending standards fueled double-digit price appreciation.Įconomists say today’s market is very different. But the month-to-month decline was a sign that high home prices - and tight supply - are starting to slow down sales.Īccording to the S&P CoreLogic Case-Shiller national home price index released this week, home prices were up 9.5% in November, and even higher in cities like Phoenix, Seattle and San Diego. When compared to the same month in the prior year, pending sales were still up more than 20% in December. Sales of existing homes that are under contract but haven’t closed dipped 0.3% from the previous month, the fourth monthly decline in a row. Pending homes sales continued falling in December, the National Association of Realtors said Friday.
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