Boom or Bubble in the US real estate market?

Intereconomics

Volumn 40, Issue 5, 2005, Pages 273-284

  Belke, Ansgar ^a   Wiedmann, Marcel ^a  

^a UNIVERSITY OF HOHENHEIM   (Germany)

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EID: 33746870344     PISSN: 00205346     EISSN: 1613964X     Source Type: Journal    
DOI: 10.1007/s10272-005-0157-0     Document Type: Article

References (81)

1. All house price measures in this paper are from the Office of Federal Housing Enterprise Oversight's (OFHEO) weighted repeat-sales price index unless otherwise noted. The House Price Index (HPI) of the OFHEO shows the price change for the same home, meaning a rise in prices does not reflect better quality homes but homes of the same quality becoming more expensive.
2. M. Mussa: Asset Prices and Monetary Policy, in: W. C. Hunter, G. G. Kaufman, M. Pomerleano (eds.): Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies, Cambridge 2003, MIT Press, pp. 41-50. In contrast to asset prices, consumer prices include goods and services that are consumed for everyday living, such as food, petrol and cars.
3. A. Bollard: Asset prices and monHtary policy, in: http://www.bis.org/ review/r040206f.pdf [21.06.2004].
4. In contrast to small open economies, for a large and rather closed economy like the USA, the exchange rate does not play as significant a role as other asset prices, i.e. mainly equities and real estate. For this reason, it is excluded from this discussion.
5. See T. Helbling, M. Terrones: Real and Financial Effects of Bursting Asset Price Bubbles, in: IMF World Economic Outlook, April 2003, pp. 61-94
6. BIS: Cycles and the financial system, in: 71st Annual Report of the Bank for International Settlements, 2001, pp. 123-141
7. J. M. Barata, L. M. Pacheco: Asset Prices and Monetary Policy: Wealth Effects on Consumption, Paper prepared for the 20th Symposium on Banking and Monetary Economics, Birmingham 2003, University of Birmingham, p. 11
8. K. E. Case, J. M. Quigley, R. J. Shiller: Comparing Wealth Effects: The Stock Market versus the Housing Market, NBER Working Paper, No. 8606, 2001, p. 14
9. C. Detken, F. Smets: Asset price booms and monetary policy, ECB Working Paper Series, No. 364, 2004, p. 13
10. and J. Caruana: Banking Provisions and Asset Price Bubbles, in: W. C. Hunter, G. G. Kaufman, M. Pomerleano (eds.), op. cit., pp. 537-546.
11. BIS, op. cit., p. 123
12. F. Allen, D. Gale: Bubbles and Crisis, in: The Economic Journal, Vol. 110, 2000, pp. 236-255.
13. T. Just: Bubble Trouble am Wohnungsmarkt?, Deutsche Bank Research Aktuelle Themen, No. 257, 2003, p. 4.
14. IMF: Asset Prices and the Business Cycle, in: IMF World Economic Outlook, May 2000, pp. 77-112
15. C. Detken, K. Masuch, F. Smets: Issues Raised at the ECB Workshop on "Asset Prices and Monetary Policy", in: http://www.ecb.int/events/pdf/conferences/detken-masuch-smets.pdf [04.08.2004], p. 2.
16. C. Kent, P. Lowe: Asset-Price Bubbles and Monetary policy, Reserve Bank of Australia Research Discussion Paper, No. 9709, 1997, p. 5.
17. R. S. Kroszner: Asset Price Bubbles, Information, and Public Policy, in: W. C. Hunter, G. G. Kaufman, M. Pomerleano (eds.), op. cit., pp. 3-13.
18. C. P. Kindleberger: Bubbles, in: J. Eatwell, M. Milgate, P. Newman (eds.): The New Palgrave: A Dictionary of Economics, Vol. 1, A to D, London 1987, Maruzen, pp. 281-282.
19. A. H. Meltzer: Rational and Nonrational Bubbles, in: W. C. Hunter, G. G. Kaufman, M. Pomerleano (eds.), op. cit., pp. 23-33
20. K. E. Case, R. J. Shiller: Is There a Bubble in the Housing Market? An Analysis, Paper prepared for the Brookings Panel on Economic Activity, 2003, p. 16.
21. C. P. Kindleberger, op. cit., p. 281.
22. K. E. Case, R. J. Shiller, op. cit., p. 2.
23. M. D. Bordo, O. Jeanne: Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy, NBER Working Paper, No. 8966, 2002, p. 4.
24. B. Renaud: Comments on Theory and History of Asset Price Bubbles, in: W. C. Hunter, G. G. Kaufman, M. Pomerleano (eds.), op. cit., pp. 239-243.
25. P. Hilbers, Q. Lei, L. Zacho: Real Estate Market Developments and Financial Sector Soundness, IMF Working Paper, No. 01/129, 2001, p. 28.
26. R. Herring, S. Wachter: Bubbles in Real Estate Markets, Zell/Lurie Real Estate Center Working Paper, No. 402, 2002, p. 4.
27. Ibid.
28. Joint Center for Housing Studies of Harvard University (JCHS): The State of tHe Nation's Housing: 2004, in: http://www.jchs.harvard.edu/ publications/markets/son2004.pdf [14.07.2004], p. 7.
29. Betting the house, in: The Economist, Vol. 366, No. 8314, 2003, pp. 72-73.
30. A. Bollard, op. cit., p. 4.
31. A. J. Schwartz: Comments: Shifting the Risk after Shifting the Focus, in: W. C. Hunter, G. G. Kaufman, M. Pomerleano (eds.), op. cit., pp. 383-387
32. J. Caruana, op. cit., p. 537.
33. C. Bean: Asset prices, financial imbalances and moAetary policy: are inflation targets enough?, BIS Working Papers, No. 140, 2003, p. 13.
34. C. Borio, P. Lowe: Asset prices, financial and monetary stability: exploring the nexus, BIS Working Papers, No. 114, 2002, p. 11.
35. See also F. Allen, D. Gale: Bubbles, Crisis, and Policy, in: Oxford Review of Economic Policy, Vol. 15, No. 3, 1999, pp. 9-18.
36. BIS, op. cit., p. 139.
37. Bubble and squeak, in: The Economist, Vol. 364, No. 8292, 2002, pp. 22-24.
38. S. Barnes, G. Young: The Aise in US household debt: assessing its causes and sustainability, Bank of England Working Paper, No. 206, 2003, p. 11; see also Figure 1.
39. This is a main difference to the policy-making process of the European Central Bank (ECB), where special attention is paid to monetary growth (pillar two, measured via M3). By looking at the money supply and thus at credit, the ECB has the potential to fight bubbles at an earlier point in time.
40. C. Borio, P. Lowe, op. cit., p. 1.
41. IMF, op. cit., p. 90.
42. IMF, op. cit., p. 89.
43. D. Baker: The Run-Up in Home Prices: Is It Real or Is It Another Bubble?, in: http://www.cepr.net/Housing_Bubble.htm, 2002 [07.06.2004], p. 9.
44. K. E. Case, R. J. Shiller, op. cit., p. 21.
45. K. E. Case, R. J. Shiller, op. cit., p. 3, see above.
46. JCHSH The State of the Nation's Housing: 2003, in: http://www.jchs.harvard.edu/publications/markets/son2003.pdf [15.06.2004], p. 2.
47. Ibid., p. 17.
48. Moreover, between 2001 and 2003 homeowners converted more than $300 billion of their home equity into cash (Freddie Mac: Cash-Out Refi Report, in: http://www.freddiemac.com/news/finance/docs/ cashout_volume.xls [15.07.2004], p. 1).
49. Betting the house, in: The Economist, Vol. 366, op. cit., p. 72.
50. U.S. Department of Housing and Urban Development: U.S. Housing Market Conditions, in: http://www.huduser.org/periodicals/ushmc/SPRING2004/ USHMC-04Q1.pdf [21.07.2004], p. 65.
51. Castles in hot air, in: The Economist, Vol. 367, No. 8326, 2003, pp. 8-10.
52. S. Barnes, G. Young, op. cit., p. 11.
53. H. Croke: The Run-Up in Housing Prices is NoH a Bubble, in: http://www.cepr.net/columns/housing_bubble/no_housing_bubble.htm [29.06.2004], p. 1
54. T. Helbling, M. Terrones, op. cit., p. 68.
55. H. Croke, op. cit., p. 2.
56. In 2003, the government passed the American Dream Down Payment Act through which the Federal Housing Authority provides $200 million annually to assist families in fulfilling their down payment obligations (ibid).
57. Asset-backed security markets have become increasingly popular, with a large share being mortgage-backed security (MBS) transactions. New ways of structuring MBS deals have also improved the lending possibilities of the big state mortgage agencies, such as Freddie Mac. Additionally, real estate investment trusts are growing in volume and number (National Association of Real Estate Investment Trusts: Annual Market Capitalization, in: http://www.nareit.com/researchandstatistics/ marketcap.cfm [30.07.2004], p. 1). Thus, real estate as a financial investment now plays a stronger role in fundamental demand than it has before.
58. Please note that these statistics were arrived at by dividing the "owner households" by the "total occupied households". No information is given about the number of people who occupy the individual households.
59. Castles in hot air, in: The Economist, Vol. 367, op. cit., p. 8.
60. Ibid., p. 9.
61. This is supposedly a better reflection of the personal income of the average home buyer, because it excludes the few very rich people.
62. D. Baker: The Housing Bubble in NHw England, in: http://www.cepr.net/ New_England_Housing_Bubble.htm [07.06.2004], p. 1.
63. Following D. Baker: The Run-Up in Home Prices, op. cit., p. 6.
64. U.S. Census Bureau: Rental and Homeowner Vacancy Rates for the United States, in: http://www.census.gov/hhes/www/housing/hvs/q204tab1.html [21.07.2004], p. 1.
65. An explanation for the recent divergence between renting and buying could be a mixture of the incentives of home ownership, the ease of receiving credit and historically low interest rates. Another influence may emerge from individuals buying homes for speculative reasons. In such case individuals do not base their investment decisions on future income streams from rents but on a higher resale price at a future date. All this has decreased the attractiveness of renting and has increased rental vacancy rates in recent years (H. Croke, op. cit., p. 4
66. U. S. Census Bureau: Rental and Homeowner Vacancy Rates ..., op. cit., p. 1).
67. JCHS 2004, op. cit., p. 24.
68. E. E. Leamer: Bubble Trouble? Your Home Has a P/E Ratio Too, UCLA Anderson Forecast Quarterly, June 2002, p. 1.
69. House of cards, in: The Economist, Vol. 367, No. 8326, 2003, pp. 3-5.
70. B. Renaud, op. cit., p. 240.
71. National Association of Realtors: Existing Single Family Home Sales, Current Release June 2004, in: http://www.realtor.org/Research.nsf/Pages/ EHSdata [08.08.2004], p. 1.
72. National Association of Realtors: Profile of Second Homes: 2004 Update, in: http://www.realtor.org/Research.nsf/files/secondhome04.pdf/ $FILE/secondhome04.pdf [08.08.2004], p. 1.
73. National Association of Real Estate Investment Trusts, op. cit., p. 1. Although real estate investment trusts invest largely in commercial real estate, they also participate in the residential real estate market, albeit mainly in metro areas.
74. J. Krainer: House Price bubbles, Federal Reserve Bank of San Francisco Economic Letter, No. 2003-06, 2003, p. 2.
75. JCHS 2003, op. cit., p. 8.
76. D. Baker, S. Baribeau: Homeownership in a Bubble: The Fast Path to Poverty?, in: http://www.cepr.net/homeownership_in_a_bubble.htm [07.06.2004], p. 4
77. A. Greenspan: Home MHrtgage Market, in: http://www.federalreserve.gov/ boarddocs/speeches/2003/20030304/default.htm [08.06.2004], p. 3.
78. While the District of Columbia is not a state, it is looked at separately.
79. The ECB is confronted with a similar situation of steeply increasing real estate prices in France and Spain whereas house prices in the largest euro area country Germany have tended to fall in the last couple of years.
80. J. McCarthy, R. W. Peach: Are Home Prices the Next "Bubble"?, Federal Reserve Bank of New York Economic Policy Review, Vol. 10, 2004, No. 3.
81. By the way, this view is even corroborated by a Fed transcript. Today's housing bubble in the USA is a consequence of policies designed to ameliorate the effects of the bursting of the stock-market bubble. All in all, it does not seem to be too far-fetched to place the blame for the stock and real-estate bubbles squarely on Alan Greenspan and his easy-money colleagues at the Fed. Consequently, it was with interest that one could read "Fed Officials Worried in 1999 About Managing Stock 'Bubble'" in the Wall Street Journal of 7 March 2005. The article discusses the fact that in 1999 Fed officials were aware of the stock-market bubble, even though they claimed before and after not to have known. See explicitly the just released revealing December 1999 Federal Open Market Committee minutes Federal Reserve: December 1999 Federal Open Market Committee Transcripts, at: http://www.federalreserve.gov/fomc/transcripts/1999/19991221meeting.pdf [22.06.2005]).