Why did people think house prices can't fall?
When I was looking to find a new apartment, I was in the office of a parasitic bloodsucker -- whoops, I'm sorry, a real estate broker -- in my neighborhood (brokers have locked down the apartment market in my corner of New York pretty tightly, largely because of immigrant and absentee landlords). This particular broker also showed houses for sale, and his office was decorated with a cartoon that depicted a broken-down old couple hobbling along in the street, above a caption that mocked them: "They are waiting for home prices to drop." I thought of that cartoon while reading this Mark Thoma post about what caused the housing bubble, which takes as its jumping-off point this post at the NYT economics blog by Ed Glaeser. Glaeser admits that "The housing price volatility of the last six years has been so extreme that it confounds conventional economic explanations," and agrees with housing economists Case and Shiller that "housing bubbles were fueled by irrationally optimistic beliefs about future housing price appreciation." He uses the Las Vegas bubble as his example:
I once thought that the Las Vegas housing market was so straightforward (vast amounts of land, no significant regulation) that no one could be deluded into thinking that prices could long diverge from construction costs, but I was wrong. I underestimated the human capacity to think rosy thoughts about the value of a house.
My father lived in Las Vegas in the mid 1990s, and when I would visit, I would be astounded by the exponential growth along the I-215 corridor. It seemed utterly senseless -- shopping centers that hadn't existed on my previous visit would be filled to capacity with virtually full parking lots (I'm thinking of the Eastern Ave. exit circa 1998), while the centers a few exits back toward downtown would be nearly empty. The fetishization of the new shopping centers was indicative of the insanity that was free-floating through the region then. The new housing developments would already be started before the road grid even reached them. Planners had a difficult time coming up with all the new names for all the new cul-de-sacs being created. And the new homes were presumably being purchased by the new arrivals to the area, who by and large were construction workers in the home building business. It didn't take a genius to figure out that pattern was unsustainable.
The key question, that Glaeser declines to try to answer here, is why did people think such "rosy thoughts"? Thoma quotes Shiller, who argues that housing bubbles have happened because "people believed that both land and building materials were becoming relatively more scarce over time," which is plainly false. Still, how come people in Las Vegas and Henderson believed houses would continue to go up, against the obvious evidence in front of their face of the utter lack of land and materials scarcity? Thoma suggests people assume a long-term premium on their "investment" in a home, because they make a semi-conscious connection between buy-and-hold investing in the stock market (presumed to bring surefire 8 percent returns over the long haul) and home ownership. But buying a home is a consumption purchase, not an investment.
The question then is why people were so quick to view housing as a great investment and all those renters out there as "suckers" who were "just throwing their money away." The answer, I think, is straight-up propaganda. Consider how often the NAR economist is cited in the press as an objective expert on the meaning of housing data. Consider how much blather we hear from politicians about the ownership society and the sanctity of home owning. Think of the tax breaks and subsidies that homeowners get and seem to believe they deserve. Think of the whole parasitical class of real estate agents and the relentless advertising on their behalf and on the behalf of the mortgage lenders and banks.
In the U.S. an ideology about homeownership has become entrenched that seems guaranteed to produce irrational (by economists' standards) views about home owning. So it's hardly surprising that this ideology yielded a housing market full of deluded buyers and sellers who had little understanding of the true value of what they were bargaining over. Sadly, very little has been done, even now, to dismantle this erroneous view of housing. Perhaps because of the vested interests -- I doubt my neighborhood broker has taken down his cartoon.