Shaun Kenney | Politics and Religion in Virginia's Public Square


Tuesday, April 13, 2004 The Impending Housing Bubble? I keep hearing about this, and I really don't know what to make of it. Yes, I know that housing prices have gone through the roof in recent years (and especially here in the Fredericksburg area), but there is such a lack of affordable housing, and no dearth of buyers in this area. The market values are setting themselves at this point, but there are economists who disagree: If you still need proof that a bubble is building in the housing market take a look at the findings of my economist colleague Dean Baker at the Center for Economic Policy & Research in Washington, D.C. He has tracked national housing prices going back to 1951. Prices pretty much track the rate of inflation up until 1995. But since then, average prices on new and existing homes have soared more than 35 percentage points beyond the overall rate of inflation. Is that unusual? You bet it is. advertisement This sudden increase has no plausible explanation other than a bubble, in my view. Part of the bubble's expansion is explained by the enormous wealth the stock market generated in the late '90s, which spilled over into real estate, as happened in Japan during the '80s. Even after the stock market crashed in 2000-02, financial "experts" -- the same ones who mistakenly counseled unfortunate 401[k] investors that there was "no way" anyone investing in the stock market for the long run could lose -- recommended housing as the next big thing. Of course, that's exactly what a bubble is -- people buy an asset because its price is rising, and that pulls more buyers into the market. Prices rise further, and the cycle continues, without regard to the real value of the asset -- whether it's stocks, housing, or tulip bulbs in the 17th century. Do I buy it? Not necessarily. But home construction and the housing industry is the backbone of the American economy. Housing starts are a sign of health, declines are a sign of weakness, for no other reason than all of the other sectors of the economy that new homes affect. I just don't see a bubble. All I see is a radical demand for affordable housing. posted by Shaun Kenney \| 4/13/2004 12:15:00 AM \| 0 comments 0 Comments: Post a Comment Home
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