What Irrational Exuberance Looks Like

Go read this Kevin Drum post. The important takeaway is this picture, showing that home prices had been, except for the last decade, utterly flat since World War II.

Kevin spends his post providing a bunch of reasons why people are so silly as to believe they’re going to get rich off of their house–things like the difficulty of adjusting for inflation and the rarity of coverage of markets (like Detroit) that have steadily lost value. As I said, go read the post, because it’s a fascinating read. (Admittedly, facing the hopefully imminent reality of losing a third of my home’s 2002 value makes me particularly interested.)

I’d like to raise another question raised by the graph, though: what the hell were we thinking? How did most of our society–including many “serious” experts–believe that spike was real–or sustainable?

It’s an important question because those same “serious” experts are treating that gigantic spike as if it should have been treated as real. The guys in Treasury continue their game of extend and pretend so as to spin out foreclosures more slowly, thereby insulating banksters from paying a price from treating this spike as if it were real, all the while suggesting the homeowners were each, individually, responsible for this collective decade of housing insanity. There’s little acknowledgment of how crazy the whole thing was.

And then consider how central this spike was to sustaining America’s economy. We’ve got entire cities and states whose entire culture of affluence was significantly dependent on this spike. The illusion that America hasn’t been in decline for the last decade relied on this spike. And we have yet to start talking about what we’ll replace the spike with (some Democrats had hoped to build a new bubble on green technology–which would at least have the bonus of providing necessary societal value–but unless Obama unleashes EPA to set new greenhouse limits, the do-nothing Senate looks determined to squelch efforts to invest further in green technology).

The spike in this graph really seems like a larger lesson about America: its failed media and pundit class, its fundamentally bankrupt finance-based economy, and its failing political culture.

  1. tjbs says:

    What the hell were were ….you’re stuttering.

    At the peak 30% of the cars sold in California were brought with proceeds from inflated home equity prices. I know people in New York who upgraded their boats, yearly, based on what the bank told them their equity would carry.

  2. qweryous says:

    Excellent post on this topic.

    Careful examination of the graph provided might lead some to consider that there was a “boom” in the late 1990’s resembling the similarly labeled “1970’s boom” and “1980’s boom”.

    The different ending of the recently collapsing bubble is due in part to the fact that the trend (starting with the 1990’s boom) continued in a previously unseen way (unseen in the US residential real estate market but previously observed in other markets, and previously in some subsets of the US residential market).

    The loudest, most politically connected and LAST shrill ‘salesman’ for this bubble was the previous president. It was necessary to break out the phraseology in order to get the last group of ‘investors’ (homeowner/HAMP participants/foreclosure victims) into the game.

    What educated economist,investment or real estate professional could have been a witness to this and not expected it might end badly?

    Book which should have supplied some helpful prevention and recognition hints: ” Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay first published in 1841.

    Having read this book prior to recent events-sometimes had an idea it might end up like- the dot com stock thing did.

    • Mary says:

      Another difference is what was going on with the money supply – particularly in a fairly dead jobs period from 2000 to 2010. Not going to go into a lot of detail and this link is mostly for the chart, but there are lots of other charts and graphs you can use as well:


      Basically, the way the “hurt” of the dead jobs market and wealth redistribution from the lower/middle class to the upper class and the out of control military budget and “no-return, no infracture” pork spending in Congress and bottomless wars etc. was muted was by bubble wrapping it in a flood of money and easy credit.

      That money had to inflate value somewhere. In part, it held more value in the stock market than should have been there, but the smart money in the market was savvy to this and limited the bubble (although there was still a significant bubble there). So the value went to RE and it was a policy driven result that the market is crashing. Anti-middle class and anti-job policies coupled with FLOODS of money/credit = a bubble had to grow somewhere and the biggest credit purchases in the country and the easiest way to channel the money flood was RE.

  3. klynn says:


    I have shared this story here before. My husband and I found this great book on home buying and mortgage know-how for first-time home buyers when we went to purchase our first home. The book had a wonderful chapter on figuring “how much house” you can afford. The chapter walked through all the essential costs and figures many miss and most bank mortgage calculating forms do not include. We walked into the bank knowing what we could afford. The bank approved us for 35% over what we had calculated. That amazed us and made us not trust our lender. We bought a house within the price range we knew we could afford, not what the bank told us. You should have seen our banker when we asked her how the board came up with the figure they approved us for. She stuttered and could not answer.

    When we bought our house, both the bank and our realtor were quite critical and almost angry that we “did not buy as much house as we should have.”

    We look back with lots of questions about the behind the scenes manipulation going on.

    • PJEvans says:

      Real estate sales people will try to get you to buy as much house as the bank will lend you money for, not as much house as you can afford.

      I think it’s because both the RE salespeople and the banks make their profits from the fees and commissions that you pay, based on a percentage of the sale price.

      I have a friend with stories about looking at houses: said ‘no pool’, so the sales agent only showed houses with pools. (ISTR that the friend ended up reading the riot act to the agent.)

    • emptywheel says:

      Didn’t read that book, but when I bought my house (33% more value ago), I pretty much did the same thing. Just two of us, was going to remain just two of us, why did we need a much bigger house, I asked?

      Nevertheless, after 20% down, 8 years, and a bright new bathroom (among other things), it’s still worth shit.

      How much house you can afford/need is one thing. This tanked market is another thing. And I’m the lucky one: I’ve got a way to get out!

      Of course that also means I won’t get a chance to do a series on walking away…

      • klynn says:

        It’s the “worth sh–t” part that is so scary for all of us. We are doing so much sweat equity to make sure our house value holds “something.”

        I am so sorry you have had to face this but am thankful you do have a way out.

        • bobschacht says:

          Amen to klynn’s sympathy. I hope you are not having to go through foreclosure or some such (no need for you to answer re specifics.) As in many aspects of life, timing makes all the difference. I was fortunate enough to buy early in the rising spike, and to sell before it peaked, but my wife fell victim to buying near the peak and then being unable to sell after the crash when she needed to sell because she was left with an upside down mortgage. Cram-down might have saved her, but alas…

          One of the unfortunate effects of the crash will be a widening gap between rich and poor, as the rich get protected from their irrational exuberance while the middle class are unceremoniously dumped into poverty by having to pay inflated mortgages, unemployment, etc. This will take a long time, if ever, to heal.

          Bob in AZ

    • timbo says:

      Yeah, that happened to me in 2001 too. I was approved for something like 5.5 times my household income?! Crazy! And my realtor was looking for “deals for you” that required 0% down? Who the heck is taking 0% down loans seriously? Only bankers, realtors, and home buyers who are actively speculating would consider such loans and terms. And that’s the problem, owning houses became a commodity for getting rich…instead of a sign that one was actually rich and stable. And the trend is continuing.

      This country has been better run and the stability that we had before the know-nothings began running things and dictating the laws, etc, to foment and perpetuate get-rich-quick schemes, and finally elected a President (GWB BTW, in case you were wondering) to keep their schemes floating. Of course, when people started realizing that GWB and his cronies were on their way out, the markets tanked…no one would be around to perpetuate the scam…or so we thought…until the Democrats and THEIR president got into power and instead of cleaning things up, kept the scammers juggling the economy, supposedly to figure out what to do next? Or is it that they know very little themselves about how to effectively govern, the Democrats?

  4. Mary says:

    Many decades back, I took a hit in my macroeconomics class by arguing against the “they aren’t making any more of it, but they are making more people who need it” mantra re: real estate. Even so, I don’t think chart shows the whole story. IMO, it’s not that anyone was smoking anything, it’s more the fact that home values are not a free-standing “fact” or value. They are an amalgem of a LOT of things, but, without droning on, in their essence they are a reflection of what the society in which the homes/re are found is doing in re: it’s middle class (imo, which was my opinion decades back that my macro prof didn’t really like).

    Home values reflect middle class policies in their society. A society that is stoking its middle class engine will have value increases, one that isn’t won’t. jmo and you’re free to not like it as much as my macro prof didn’t

    But don’t lump all pundits in together. Nouriel Roubini was very clear eyed at all operative times about what was going on in the real estate market.

    Actually – I’d get behind the orange glowy guy’s recommendations on Geithner et al if I thought Obama would bring in the likes of Dr. Doom (Roubini) and Krugman

    • emptywheel says:

      Yup, Roubini was on it, Shiller, whose numbers these were, was on it. There were people who realized the shitpile was just that. Still, even NOW, they’re not listening to the underlying analysis they were doing about what is needed to sustain house prices.

    • Hugh says:

      Actually – I’d get behind the orange glowy guy’s recommendations on Geithner et al if I thought Obama would bring in the likes of Dr. Doom (Roubini) and Krugman

      Roubini is just another deficit hawk. He’s fairly conservative when it comes right down to it. Krugman remains too Establishment bound. Remember even at this late date he can’t cut the umblical to Bernanke.

    • PierceNichols says:

      Are you sure you want to argue that US policies were better for the middle during the last decade then the rest of the post-WWII period? REALLY??

      Anyone, I suspected the run-up of being unsustainable as soon as I became aware of it, and that was confirmed when I saw the circa-2003 version of the chart in the original post. I came to the conclusion that I could not predict the timing of the coming crash well enough to reliably profit from the bubble, due to the time and expense required to sell real estate. So I got out and have stayed out; a house is a hugely expensive asset to own and I did not believe I’d be able to recover even my initial investment when the market tanked. Renting has been cheaper in most of the places I have wanted to live in the interim and while I enjoyed the difference rather than saving it, I think the reduced stress and increased enjoyment was worth it. YMMV.

  5. allan says:

    ” … while suggesting the homeowners were each, individually, responsible for this collective decade of housing insanity.”

    As opposed to players in commercial real estate, for whom strategic defaulting is all in a day’s work.

  6. Arbusto says:

    In silicon valley, where I lived until recently, prices pretty much hold steady, and exceed inflation adjusted prices. A 3/2 55 yr old 1 car garage, cement floor 1300 sq ft asking $600,000. Even when I thought my future income/IPO possibilities were unlimited (they weren’t) I couldn’t see why people living in the valley didn’t understand they wouldn’t qualify to buy a house like they’d lived in because of the inflated price. I thought that meant a big imbalance in actual vs perceived value; but people keep buying in areas such as the SF bay.

    One of FDL’s econ wonks, I think masaccio, several years ago wrote a wonderful article how Clinton pushed the economy by off-shoring and selling intellectual properties, while Bush pushed Real Estate to make the numbers look better than they were. The house shopping public bought in and assisted in keeping the overall economic bubble floating in ignorant bliss. Now some elites question buying vs renting for the hoi polloi, I guess in an effort to capture the rental market for well to do, and thereby better control the under class (us). Some owners bought at the wrong time and suffered a paper or actual loss when selling. IMO I’d return to the old way of looking at ownership as having your own roof over your head, and if lucky, a paid off mortgage as you enter your dotage, than worry about Simon Legree raising the rent.

  7. JohnLopresti says:

    I like a series of comments from Mary, above. I think the cost of the two wars likely equates to the budget crunch and business failures which ensued. ?How, precisely, does the US finance its wars? Perhaps, since Clinton did not access the usual Democratic party war-as-solution sort of economics, the surpluses his tenure generated were easy harvest for the Republican administration that followed; except Clinton-era prosperity was built largely on ephemeral traditional middle class economics, tried and tested. The housing debacle which Republican profit-taking generated, also seemed a little slow to launch; not a nimble industry; rather, ponderous, much like the emblem elephant of the Republican party.

    May be time to evaluate the part of pasture beyond the stable as a likely place to build, a little home. Having land, in addition to the housing itself, is a traditional counterbalance for times when the machinery of liquidity undergoes a variety of cryogenic stages.

  8. bobschacht says:

    Like many things, this started out as a somewhat reasonable idea under Clinton that turned into a Sorcerer’s Apprentice under Bush.

    Clinton wanted to favor policies that help the lower Middle Class move up the socio-economic ladder, and one of those policies was to make it easier to buy a home. Note that your spike began in the last years of the Clinton administration, when the Rubinites were sowing the seeds of the present economic disaster by throwing out Glass-Steagall, and de-regulating derivatives, etc.

    Note also that your spike was preceded by two smaller spikes, and that your spike did not exceed the peak of the two previous spikes until Bush took over. Its like the two previous spikes were brought back to earth by some braking mechanism that was tossed aside when Bush became President. Bush didn’t care so much about helping the lower Middle Class become part of the “Ownership society;” he was just interested in deregulation and “cutting red tape” so his rich friends could roam free and increase their profits. The result? “Irrational exuberance” in the form of a Wall Street populated by Sorcerer’s Apprentices.

    One of the things that made the spike so seductive is that, given increasing population and a constant land mass, housing prices will, over the long haul, go up. That is practically a gold-plated certainty. However, that certainty does not prevent short-term excesses, irrational exuberance, and other run-away processes from spiking and cratering.

    But your graph does suggest an answer to the knotty problem of how to value homes in the present market: i.e., use the home values of the Post-WWII period (circled in red in your graph) as providing a realistic benchmark (perhaps adjusted for inflation).

    Bob in AZ

    • emptywheel says:

      But your graph does suggest an answer to the knotty problem of how to value homes in the present market: i.e., use the home values of the Post-WWII period (circled in red in your graph) as providing a realistic benchmark (perhaps adjusted for inflation).

      With the added benefit that it would bankrupt Citi once and for all.

    • PierceNichols says:

      There are two critical problems with the increasing population + fixed land = rising housing prices formula in the US. First, the population density of the US is very low by the standards of the rest of the industrialized world. There’s plenty of land to expand into if it were to become necessary… but it will not, because of the second issue. Population growth is just about over — birth rates are declining nearly everywhere at rates from steep to precipitous. The US birth rate is barely above replacement; the birth rates in nearly all of Europe are already below it. Mexico is approaching sub-replacement birth rates at a remarkable clip. Japan and Russia are facing aging populations and negative population growth. I think global population will go into decline within 25 years; 40 at the outside.

      • bobschacht says:

        Good points. However, density issues are not elastic, especially where people cannot sell their present home to move to a lower density location because of the housing market. Besides, not that many New York City denizens want to move to rural Montana, even if they could get far more living space for their dollar there. I live in Flagstaff, AZ where the housing market has held up relatively well, compared with other places. But go down I-40 fifty miles in either direction, and you can get much cheaper living space in Winslow or Williams, where the economies are more depressed.

        Generally, you are correct about the declining birth rate in the advanced industrial nations– a theory often known as “Demographic Transition.”

        Your point would be generally valid if the whole world could be expected to undergo demographic transition as the “benefits” of industrialization penetrate throughout the world. But the “interests” of Globalization might dictate that some areas of the world be kept in perpetual poverty in order to supply the work force that the rest of the world needs to make stuff cheap. Maybe a thousand years from now, there will be a worldwide demographic transition, but I’m not gonna hold my breath. As long as the World’s population continues to grow, there will be upward pressure on average housing prices throughout the world. But regionally, there can still be boom and bust cycles that shake everyone up.

        Bob in AZ

        • PierceNichols says:

          Not everyone has to move out of the more densely populated areas in order for the wide open space to act as a strong drag on housing prices (absent bubbles or other market chicanery). It’s what held prices flat during most of the post-war period despite a steep increase in both population and real wages.

          Demographic transition is a phenomenon that appears to be largely driven by urbanization, not industrialization. It’s happening everywhere, even sub-Saharan Africa — the steepness of the decline over the past twenty years, even in otherwise very poor countries, is breath-taking. Some people clearly wish it wasn’t so, but I don’t believe any group or reasonable alliance of groups within global society has the power to change it. In fifty years, nearly everyone will live in a country that is either in demographic transition or already past it.

      • GDC707 says:

        Population growth is just about over — birth rates are declining nearly everywhere at rates from steep to precipitous. The US birth rate is barely above replacement; the birth rates in nearly all of Europe are already below it. Mexico is approaching sub-replacement birth rates at a remarkable clip. Japan and Russia are facing aging populations and negative population growth. I think global population will go into decline within 25 years; 40 at the outside.

        Do you have a link for all this? Thanks

        • PierceNichols says:

          The UN Population Report is the starting point. Then you have to read it carefully and realize that their midline must be wildly high because it requires a substantial increase in China’s birthrate. Also, a comparison between the current report and reports for the past twenty years (it only comes out every 5 years, so that’s not hard) shows that they’ve consistently overestimated actual population growth. That plus a little simple extrapolation gets me to the conclusion that global demographic transition is going to happen very, very soon.

          • bobschacht says:

            That plus a little simple extrapolation gets me to the conclusion that global demographic transition is going to happen very, very soon.

            Color me skeptical. Remember that demographic transition is supposed to involved lower birth rates and lower mortality rates. I don’t see that happening in Africa or a lot of the Third World, where famine, war, and natural disasters are keeping mortality rates high, and despite all the suffering involved, birth rates do not seem to be going down.

            I will concede that more countries are experiencing the demographic transition, but it doesn’t look like it will happen anytime soon in many countries.

            Bob in AZ

  9. person1597 says:

    Speaking of history — as in “we’re history”… (chart porn follows…)

    Japan, the US, Bubbles and Deflation

    To some extent the widespread predictions of high inflation in the US have a political bias. Opponents of government intervention often point to excessive inflation as the inevitable outcome of bailouts, incentives and monetary easing. The Japanese government also played a strong interventionist role in the wake of that county’s twin bubbles. As the chart shows, accelerating inflation has not been the result.

    From the looks of it, we’re only just beginning the final meltdown phase.

    Another 50% equity haircut over the next two years will remove all doubt that synchronized global decline is the inevitable outcome of demand deflation — all predicated on the Reagan era “trickle down” voodoo economic policy apparatus which sought to bolster the political elite with budget-busting tax reductions.

    The anti-tax fetishists don’t realize that starving markets of liquidity actually deters customers from making purchases.

    Post November, watch as Republicans direct new obstructive firepower against our ailing economy curtailing any short-term chance of recovery. I can hear the aroused conservative chorus rising from the halls of Congress… Remember Terri Schiavo!! (Glub, glub, glub goes the bathtub…)

    Global austerity results in global overcapacity and the outcome is global deflation.

    Maybe the Dems will have a convenient excuse for why things fell apart under a Dem president — and so lay the foundation for a pluralistic form of governance for at least a few years beyond 2012. We should be so lucky…

    • MarkH says:

      Maybe the Dems will have a convenient excuse for why things fell apart under a Dem president

      I think there was some progress in Clinton I, but the economy was changing because of internationalization and it always takes time for thinking to catch up. I don’t blame Clinton for that and otherwise they kept the economy going pretty well. Now of course we have less excuse and the disaster we’re coming out of has given us the ability to change some things, but apparently the public hasn’t quite got it and they’re not happy with it “taking a while”. Sigh. Progress takes time even with sufficient political power.

      • person1597 says:

        Sigh. Progress takes time even with sufficient political power.

        Excellent point. These things unfold on their own clock. We’re really just spectators along for the ride. I don’t blame Obama one bit. Rahm maybe, since he’s COS. They’re looking at a tidal wave of change all right.

  10. klynn says:


    The next tragic part to this picture is that school districts grew with this spike. Now property values are declining and fewer taxes are coming in causing severe recalibration in school district budget outlooks. Many districts are looking at the need to have levies when they thought they would not. This is not the kind of climate that levies do well. However, people need to pass them simply to continue to hold their property values. If the schools take a dive too, it becomes a double hit on property value.

  11. mzchief says:

    Hmmmm …

    Another day, another record, this time in European capital flows out of “Europe” and into Switzerland, as Phillip Hildebrand is already one foot out of his Bern office, resignation firmly in hand, as he has lost all control of the EURCHF which for the first time ever dipped below 1.30. So as the world prepares for another round of wax, er, risk off, and major capital flows away from everywhere else and into the US, here are how the FX heatmaps look this morning.

    OT– “Gulf Chemist: Mercenaries Hired By BP Are Now Applying Toxic Dispersant – at Night and In an Uncontrolled Manner – Which BP Says It No Longer Uses

  12. manys says:

    The other day I was reading my morning real estate blogs, a subject of which I know very little but I do to educate myself for a hopefully-eventual purchase, and someone brought up a statistic about Japan in the early 90s. In the aftermath of the Japanese economic collapse at that time, housing prices there apparently dropped like 97% over the decade. Maybe rent-control isn’t such a bad way to wait this out..

  13. TarheelDem says:

    One of the interesting patterns I noticed beginning in the 1980s was that folks whose jobs were subject to frequent company-ordered relocation tended to treat the price of a house as if it was a value. Now from a rational expectations, conventional view of home-buying, that was insane. But as they explained to me, they thought that when they had to sell they would get a price high enough to more than offset the interest plus they would use the money as a downpayment on the next house. That works OK if house prices are comparable from one location to another or if you are moving where you can get more house for your money.

    In the 1990s, there were lots of folks relocating from California, where incomes could not keep up with real estate inflation, to NC. There are people who owned a $1 million house in California with maybe 10 years of equity (they had not bought it for $1 million); they sold the house relocated to North Carolina, paid 100% of the cost of a $220,000 house of 3000 sq. ft. (a strongly middle-class neighborhood) and were able to bank the rest in savings or investments. It was locational arbitrage pure and simple.

    Folks moving in the opposite direction were not so lucky.

    Home prices in NC have not deflated as much as other parts of the country because they were not so inflated (relative to incomes) to begin with. The major pain in the real estate market here is from the layoffs triggered by the housing price collapse in other parts of the country.

  14. Scarecrow says:

    add the failure of an incompetent group of regulators and economic advisors who either saw that spike and ignored it, or who didn’t se it. And they are still there.

  15. puppethead says:

    We don’t manufacture anything in this country anymore, houses are about the only things we make…er, made. It really shouldn’t be that surprising that our economy got rigged to inflate the importance of house construction, we had nothing else going for us. You can, in fact, see that throughout history as empires build monuments to themselves through elegant palaces or other edifices. Shortly before they collapse, typically.

  16. Hugh says:

    How did most of our society–including many “serious” experts–believe that spike was real–or sustainable?

    IBG YBG. They knew. They just didn’t care.

    • prostratedragon says:

      Compare Shiller’s graph, above, to the following, which is the closing of an abstract of a current paper from the economics staff at the Boston Federal Reserve Bank. You can read the full abstract, which might be worthwhile, and download the whole paper, which might be less so, at the link.

      (Disclaimer: I once had a very unedifying discussion with one of the authors on the matter of housing bubbles, their existence and relevance, back in about 1997 or so, when the “froth,” as Greenspan would call it, was still confined to certain coastal markets. Since my group went in print a few years later, it would be reasonable to guess that we are among the “regional market” folk; the author whom I know is nothing if not thorough. I’m going to try to post this on an fyi basis and shut up for now.):

      Reasonable People Did Disagree: Optimism and Pessimism About the U.S. Housing Market Before the Crash

      Public Policy Discussion Paper No. 10-5
      by Kristopher S. Gerardi, Christopher L. Foote, and Paul S. Willen

      Many economists, skeptical that a bubble existed, attempted to justify the historic run-up in housing prices based on housing fundamentals. Other economists were more uncertain, pointing to some evidence of bubble-like behavior in certain regional housing markets. Even these more skeptical economists, however, refused to take a conclusive position on whether a bubble existed. The small number of economists who argued forcefully for a bubble often did so years before the housing market peak, and thus lost a fair amount of credibility, or they make arguments fundamentally at odds with the data even ex post. For example, some economists suggested that cities where new construction was limited by zoning regulations or geography were particularly “bubble-prone,” yet the data shows that the cities with the biggest gyrations in house prices were often those at the epicenter of the new construction boom. We conclude by arguing that economic theory provides little guidance as to what should be the “correct” level of asset prices —including housing prices. Thus, while optimistic forecasts held by many market participants in 2005 turned out to be inaccurate, they were not ex ante unreasonable. —[Emphasis supplied by pd]

  17. wavpeac says:

    It’s pretty depressing. I can’t see any way that the upper 2% of the global market(not just America…but Dubai, Saudi, China, and US) will have any motivation to “trickle down”. It won’t be nationalism, or economic fears because it’s a global market. It seems to me the only valid pattern, if you think about national security risk, world security…would be for those who have the gold to hold it…with tight fists so that the “other guy” doesn’t get it. Warfare…is not the how power is exchanged. The current wars are just about keeping poor crazy people from blowing people up here and there…but really have little implication for world. Simply distractions.

    The power games, are being played in the hands of the upper 2% and none of them really have an investment in what happens to America. We just aren’t that important to the global economy anymore. The sleeping giant of china holds big promises and lots of cheap labor.

    I can’t see how this could resolve in our favor.

    • Hugh says:

      I can’t see how this could resolve in our favor

      Historically, such situations have been resolved via torches and pitchforks, or their equivalents. The US has been at or near revolution many times in its history. The idea that it can’t happen here is at best mistaken, at worst propaganda put out by our elites to stop us from entertaining such an idea.

  18. Hugh says:

    I tried to post this comment but it disappeared.

    The NYT has an article on a 2008 breach of Pentagon computers by a foreign agent. According to the article, the agent infected military computers by hooking up a flashdrive to a laptop on an American base in Iraq.


    Initial reports sought to blame the Russians. The current article, two years on, makes no mention of the nationality of the agent or who they were working for. What I find interesting is why this is being brought back up now. Also what nationalities had access to US bases. If the Iranians had been involved, you certainly would have heard something. If on the other hand the Israelis were the guilty parties, silence about the identity of the perpetrators would be more likely. I just find the timing and the incompleteness of the story to be the story.

  19. greybeard says:

    The chart would be a little more helpful if the Y axis started at zero and the y axis range was logrithmic. The price growth of the 90’s and 00’s is greater than the increase in the period after WWII, but not by as much as the chart would suggest. The MLS listing data show that homes around here (VA suburbs of DC) have fallen by about 1/3 since the peak in the summer of 2005.

    Further, one element that does not show here is the current propensity to build much larger homes. Can any of you econometricians adjust for that. Prices are up but a lot of the price increase is simply more home. A little like current cars are better than even the iconic cars of the 50’s.

    • Hugh says:

      Prices are up but a lot of the price increase is simply more home

      Price does not necessarily correlate to size. Ask people who live in San Francisco or in what were hot markets like Las Vegas and Florida. Additionally, while jumbos were certainly part of the market they were never the majority of it.

      • greybeard says:

        You are correct that the number of large homes was never the largest percentage of the market, and I do not live in SF (all real estate is local), but in our market the average size of a home has markedly increased from 1989, when I bought, to the last decade. In fact, all other things equal (date, neighborhood and such) the price frequently does relate to size.

    • bobschacht says:

      Further, one element that does not show here is the current propensity to build much larger homes. Can any of you econometricians adjust for that. Prices are up but a lot of the price increase is simply more home. A little like current cars are better than even the iconic cars of the 50’s.

      It has become commonplace in recent years for real estate surveys to include square footage in the table of data about homes. Agents are paying close attention to the cost per square foot. But I don’t know how far back that practice extends.

      Bob in AZ

  20. Knut says:

    A lot of things went into the bubble; ignorance on the part of home-buyers expecting to ‘move up,’pressure from the lenders, exceptionally cheap money, bank’s off-loading the risk through the derivative markets. But there was also a sociological factor that Robert Frank picked up in his Falling Behind, which is that a person’s social status came to depend more and more on the size of his house (and not just the size of his car). So it’s like an arm’s race in that market. Plus, it makes it more costly to get your kids into decent public school when the houses in the good neighborhoods go over the top.

    It was always unsustainable, and not just because of the bubble: the transport system cannot support the kind of endless suburban sprawl that came with the bubble. The implicit rise in the cost of getting to work would have put an end to the boom sooner or later.

  21. duncan says:

    “Maybe rent-control isn’t such a bad way to wait this out..”

    If you’re fortunate enough to have it, yes. An insidious, lingering after-effect of the bubble has been rent inflation. Where I live it’s resulted in the dysfunction of multiple vacancies in buildings. My building has 7, several of them sitting vacant for two years or more. Up the street a would-be condo conversion emptied 16 units. That building now sits derelict. Two completed condos are all but empty.

    Yet the landlords here still want $1,700 per month for a one-bedroom apt. People can’t afford that, yet few landlords are willing to lower prices.

    • gesneri says:

      There are more apartments for rent in my area (metro NY/NJ) than I have ever seen before, but I don’t know what they are asking in rent. I was assuming rents must have gone down because of offers like “free month’s rent!”, but maybe I was wrong and the rents are still high and no one’s biting.

      • duncan says:

        It varies, at least in LA. In my neighborhood rents are stubbornly high despite all the vacancies. A friend who manages a building in another part of town has lowered rents. Big difference seems to be that his building has had stable ownership for 20 years, while a lot more recent turnover has occurred in my neck of the woods.

        Either way we’re both seeing a lot of vacancies. I’m curious about the NY area, where I’m from originally. When I left the downturn in the early 90s had resulted in affordability for small apartments in Manhattan. For instance, a friend at the time got a 1 br co-op on Riverside Park for $67K. But there were higher stickers on “classic 5s and 7s”. However, all those new units across the river in Jersey were coming on line, at attractive prices ($800/month for large studio). What happened with all of that? How did the bubble work its dark magic?

  22. GlenJo says:

    And then consider how central this spike was to sustaining America’s economy.

    Bang! Right there you just hit it out of the park. Between the FIRE sector comprising 40% of the economy (and almost all based on RE), and much the rest construction of the very same hyper inflated housing sector, the sad realization is that the American economy has been gutted by the thirty year pillage and rape of the middle and lower class by voodoo Reaganomics.

    It’s not that we HAD a housing bubble, it’s that we HAD TO HAVE a housing bubble because there’s nothing else left. (Not that that’s entirely true, it just was one the ways used by the Bushies to inflate the economy and drain the last of the blood out of it. The others were war and massive tax cuts for the rich.)

    • onitgoes says:

      It’s not that we HAD a housing bubble, it’s that we HAD TO HAVE a housing bubble because there’s nothing else left. (Not that that’s entirely true, it just was one the ways used by the Bushies to inflate the economy and drain the last of the blood out of it. The others were war and massive tax cuts for the rich.)

      BINGO! When the housing bubble was heating up and then peaking, I kept saying: WHO ARE all the people buying these ginormous expensive houses? WHO? WHERE are they coming from?

      I live in CA, but it made no sense. I knew that there were not enough people to fill the houses (never mind whether they could afford them or not). There a neighborhoods throughout CA that are ghost towns; same goes probably double for Las Vegas, in particular. NUTTY.

  23. onitgoes says:

    I’ve been peripethetic all my life and so was always leery about buying property. I understood that it could be a sound investment but mainly if you were going to stay put for a number of years. Otherwise, it often could end up with the owner being stuck with a property they couldn’t sell quickly enough and being stuck with 2 mortgages or rent + mortgage.

    Then when I finally got to an age and stage of life where buying a property seemed more reasonable for me, the market started heating up and taking off. When I started looking around and doing my homework, I quickly came to realize that I could live more cheaply (and more securely) by renting. That said, I’m willing to live in a fairly small rental, which wouldn’t suit everyone.

    Nonetheless, despite taking a hit on my portfolio, I’m doing better than if I had bought at the time I thought I might. Phew! But I couldn’t believe how NUTTY some people got during the bubble. Usually sane and smart people I knew did some really stupid things (imo), and now they’re upside down or in foreclosure. I have some sympathy, but really, the eternal dictum, Caveat emptor, always applies.

    There are a few markets where the values have held more or less steady, but even in the SF Bay area, there have been some big drops (depending on location).

  24. barne says:

    The FBI couldn’t get any headlines for its 2004 warning about an “epidemic” of fraudulent mortgage lending.

    The little guy didn’t create this epidemic. Somebody else did. And somebody else ignored the FBI warning.

    Then, it would seem, somebody popped the balloon in George Bush’s last year, instead of in the first year of the new, almost-sure-to-be-Democratic admin. Who managed to pop it early? And how did they do it? Sky high overnight, through the roof oil?

    There must have been giant fortunes made popping that bubble early. Imagine how the winners of this game must chuckle about it all.

    • PierceNichols says:

      I would have popped the bubble in 2003, when I became aware of it, had I the power to do so.

      Also, anyone who tells you an expensive-to-own and expensive-to-sell asset that has gained no value after inflation in most of the past half a century is either a) a fool or b) attempting to pick your pocket.

      • GDC707 says:

        Or 3) Always purchased homes with an eye toward eventually renting them out in which case, with careful buying, they are doing pretty well right now. Rents eventually = money machine and increased house value is only a lucky bonus

  25. bobschacht says:

    One element of irrational exuberance that hasn’t been much examined is the role of the mortgage deduction regarding taxes. This amounts to a huge give-away to the Ownership Society, and a raspberry to everyone else (there being no deduction for rent).

    Maybe the mortgage deduction should be capped so it doesn’t amount to a windfall for the rich. Besides, that would help balance the budget!

    Bob in AZ

    • GDC707 says:

      True enough. I 1st got into RE with the goal of accumulating enough houses (mostly cottages, really) so that the mortgage deduction and depreciation would enable me to pay no taxes through my regular job.

  26. robspierre says:

    “I’d like to raise another question raised by the graph, though: what the hell were we thinking? ”

    Well, not to rub in it in (not my intent at all), but at least some of us weren’t thinking that we’d get rich off our houses–or anything else for that matter. Some of us were skeptics about everything except that–if there IS a Hell–rich people are going there.

    Madame and I bought our house to live in, not to get rich with. I grew up believing that a house was anything but a gold mine. Like boats, they are holes that you throw money into. And strip and paint.Over and over. Houses just keep the heat in and the rain off better than boats do.

    We refinanced only once and only because [a] we needed an addition to house the teenage daughters and dogs we’d accumulated and [b] our original mortgage holder–our wonderful former landlord–wanted to retire, give his ill wife HER dream house and maybe her trip to Europe.

    At the bank, we refused an adjustable rate mortgage, not because we knew it was a bad idea–everyone said it wasn’t–but because we didn’t trust anything a banker told us. For years I suspected that I was an idiot for paying more than some of my friends and acquaintances.

    We borrowed against equity once, but only to finance a modest but long overdue new kitchen. We paid off the loan in something like 18 months, if memory serves. We got all of that stuff about putting our equity to work–in the mail, by phone, and a couple of times in person, when we happened to be in the bank. But I grew up hearing how the bankers almost took my grandfather’s little North Dakota house in the Depression and how they fleeced the desperate farmers. I wasn’t about to look on them as friends or benefactors.

    Interest rates dropped. But we refused to refinance, even though we were “losing” money. Why? Simple. It would have extended the mortgage, increased our total cost, and involved up-front expenses like “points” and “closing costs” that we didn’t understand but by now knew would always be more than the banker claimed. We didn’t do the math or anything. Maybe we really would have saved some money. But maybe not. Why risk any more financial dealings than needed?

    Our mortgage got sold to Countrywide. They had some great deals. We didn’t take them for the reasons above and, no doubt, because we are stubborn. When it comes to money, we are, moreover conservative–some would say “cheap”. We never lived up to our income, much less our equity. Why? We just assume that we are being taken advantage of in any financial transaction that involves people wearing suits.

    So “what the hell were we thinking?” you ask? We weren’t. Some of us didn’t have choices and had to take what the bankers offered. Some of us were just trusting, even when it came to bankers, suits, and rich people–an admirable quality, really. Some of us weren’t trusting.

    I’m usually skeptical about the don’t-blame-the-victim argument (most victims contribute something to their victimization). But in this case, the bottom line is that whether we were geniuses or fools really didn’t matter one way or the other. We ALL got screwed. Madame and I are lucky enough to still be living in our house (for the moment) and to still have jobs and to have kids that are grown or almost. Others aren’t so lucky. But none of us are rich. None of us are payed what we should be paid, whether as wages or via our investments.

    So instead of if/why we might be miraculously smarter (or frighteningly stupider) than our forbearers, we should be asking why our rich people are, undeniably, so much richer than our parents’ and grandparents’ rich people?

    Then we should do something about it.

    Now, if only I’d had a chance to be stubborn about a stock market-based, 401K retirement plan….

  27. person1597 says:

    There is one more thing. The S&P’s 200 day moving average’s positive trend (since July 28, 2009) went ’round the bend with a $0.01 decline. That would make today the official beginning of the next dip.

    Alternatively, the market rally ahead should use its 20 day window to re-test the 200 day MA. A successful test would change history. And the election prospects for Dems might suddenly brighten.

    Failing this, the swoon takes hold and submerges the market under the heavy hand of a falling 50 day moving average until capitulation is complete.

    And when will the 200 day moving average turn positive again? Do you really want to know? Would you believe Q3 2013? Early July actually.

    That’s when we can talk about bubbles in Treasuries…

  28. b2020 says:

    “The spike in this graph really seems like a larger lesson about America: its failed media and pundit class, its fundamentally bankrupt finance-based economy, and its failing political culture”

    Please. Dean Baker said it in 2002, I read it in 2003, and it explained what I saw: the reason I could not afford the houses other people were “buying” was that they could not afford it either. Wages flat for three decades, no way housing prices can go up. Common sense.

    The People get the media and pundit class they deserve, not the ones they would wish for if they weren’t the cause of the problem. The problem with this blighted nation is the sovereign, not the elites – unless you really believe that every healthy democracy is just a functional oligarchy run by a competent, selfless elite.