|
For you Fed-heads, the papers
from the Fed's Jackson Hole Symposium are now on-line. From Dr. Robert
Shiller of Yale University, Understanding
Recent Trends in House Prices and Home Ownership.
Shiller is one of the few
mainstream academic economists to advance the view that the stock market was in a
bubble during the late 90's, and now believes that the nation has
experienced a housing bubble.
Shiller's paper makes the case
that home prices over the last six years have risen far out of line with
historical experience. He provides econometric studies finding that: that
nationwide home prices have at best appreciated at about 1% in real terms
over the last 100 years (and this would be less if you believe as I do that
the CPI understates inflation); that prices in "superstar" cities
have at best only a 1% annual advantage in long-term price appreciation; that
real home prices have tracked both rents and constructions costs very well
until the last few years.
And what is Shiller's
explanation for this phenomenon? Social psychology. After presenting evidence
that most people have unrealistic and highly optimistic opinions about future
home price gains, he states
Many people seem to be accepting that the recent home
price experience is the result of a social epidemic of optimism for real
estate. But, a related idea that I developed in Irrational Exuberance that
the single most important drive of the housing boom might be such a story,
and not something more tangible like the policies of the central bank, has
never really taken hold in public consciousness. People love to exchange
stories of crazy investors or property flippers, but most just cannot seem to
integrate such stories into a view of the movements of economies and markets.
They do not accept that the market outcomes are the result of a world view, a
Zeitgesit, that is encouraged by stories and theories whose contagion as
ideas is amplified by the excitement surrounding the price increases.
While I agree with Shiller that
there is a "social epidemic of optimism for real estate", I don't
believe that this could be the primary cause of the bubble. I see it rather
as an effect of price trends, and a secondary cause to their continuation,
with the primary cause being the expansion of credit beyond available
savings. (By credit expansion, I mean the creation of credit by financial
institutions unfunded by actual savings).
People are not, for the most
part, buying homes with their own savings. While this may be true at the very
high end of the market, most people are buying on credit. The ability of
buyers with increasingly lower incomes and credit scores to bid up home
prices with other peoples' money has been well documented in the media. The
ongoing sub-prime crises has resulted from defaults in the issuance of credit
to such borrowers.
In the absence of credit
expansion, savings are finite, and a greater quantity of savings can only be
accessed at ever-higher interest rates. It would be impossible, without
credit expansion by the central bank and the banking system, for home prices
to be bid up on credit without interest rates rising (known as the 'interest
rate brake'). The only other alternative means of funding would be for home
prices to as people shifted their spending from other goods to homes. Then
pretty much everything else, including labor (wages) would fall in price.
Shiller does argue against
interest rate policy as the cause of the bubble, noting that, while home
prices rose over the last few years as interest rates fell, home prices have
not always inversely tracked interest rates. I agree that something more than
credit expansion is necessary for a housing bubble to form. An increase in
the volume of unfunded credit will necessarily have some impact on prices, but
the area of price increases will depend on how the money enters the financial
system. Over the last few years, the development of the GSEs, and the
securitization of mortgages, fed by demand from foreign central banks and
pension funds, has made mortgages the best target for credit expansion.
I agree that the direction of
the bubble depends to extent on social psychology. I agree with Shiller that
(in the absence of the interest rate brake), once home prices start going up,
that this contributes to a widespread perception of continued gains and of
the lack of risk in home price speculation. I see the social psychology as
emerging from the bubble, and then contributing to its expansion. It is thus
both an effect of the bubble and a cause, in a feedback loop. But this
feedback process is impossible without the availability of unfunded credit.
Moreover, due to Fed policy of
trying to avoid the liquidation phase of the business cycle, the public's
speculative mentality from the stock market bubble has not been entirely
broken. While the public was burned on stocks, they are still looking around
for something else to speculate on.
The other factor that influences
where bubbles form is how the money enters the financial system. While I
believe that more research needs to be done on this area, the securitization
of mortgages, the GSEs, and the ready but non-profit-seeking market for these
assets provided by foreign central banks with currency pegs played a role in
the emergence of housing and not some other assets, as the locus of the
bubble.
I haven't read all of the Jackson Hole papers, but there is are several others that seem by their titles to put
more responsibility of monetary policy than does Shiller's.
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
| 
