Wednesday, August 24, 2005
You Heard It Here First
Regular readers know that the possibility of a housing bubble is one of my pet topics, in which I come out on the “yes, at least regionally” side of things.
Via Jane Galt, who says I told you so, who got it via Alex Tabarrok, who asks can you hear the pop coming, Robert J. Shiller wanted to know, so he built his own benchmark.
(Click on the picture for a readably large version.)
What he showed through a lot of effort and analysis is what I perceived almost intuitively, then anecdotally “proved” by reference to a price adjustment index and selected prices now and then. The only things really open to question are how regional it is, and if so, where, the causes, and whether or not any of the causes ameliorate the degree or consequences of adjustment presumably to come.
One possible factor in prices going to a permanent new level is dual earner families. However, that started well before the current steep trend.
Another possible factor is regional brittling of traditional elasticity in prices. For instance, you work in San Francisco, and ideally would like to live there, but there’s little enough housing, you can’t afford it. So you get a place you can afford in the suburbs. But there’s a price in the form of a commute. When the ring of practical commuting range is built up fully, where do you go? That’s price pressure, and it won’t be so elastic anymore. Will we telecommute and villagize so much in the future that the pressure subsides? Maybe, but I can’t see it that soon.
Some might note the trend toward larger new constuction; the McMansions. Well, that can’t help, but how much of the market is new construction of that sort, and how much impact does higher end new construction have on demand for and prices of older, existing properties? I’d guess some, but not remotely enough to account for the bubble.
We stand to see some interesting times, perhaps even if it lets us down gently.