Freakonomics Quorum: Is It Time to Believe in the Housing Bubble?

Following last week’s quorum about street charity, we’ve now brought in a half-dozen bright people to address a very different issue:

Is it finally time to believe in the housing bubble? And how much should the average American care?

While the topic of real estate has hardly been neglected on this blog, the housing bubble is another story. Here to tell the story are:

Robert Shiller, the Yale economist and Irrational Exuberance author, who has indexed U.S. home prices back to 1890; Lawrence Yun, chief economist of the National Association of Realtors; David Lereah, the N.A.R.’s former chief economist, who is now executive vice president of Move, Inc.; Barbara Corcoran, the real estate maven and author; Aviv Nevo, a professor of economics at Northwestern and a co-author of a study about FSBO (for sale by owner) sales versus sales via a realtor; and Amir Korangy, founding editor of the very good New York City real estate publication The Real Deal. Here are their replies:

Robert Shiller:

We have been in the biggest housing boom this country has ever seen, and it is not just in the United States. [The boom] has affected many of the world’s most successful economies, and has clearly been driven, at least in part, by extravagant expectations for future price increases. Such expectations tend to be found in countries where the economy has been strong enough to make high future price increases seem plausible to investors. In these countries, people are buying homes even though they have gotten very expensive, because the buyers believe that prices will rise even more. That attitude can sustain a boom for a while, but not forever.

My colleague Karl Case and I have been surveying U.S. homebuyers about their expectations. In 2005, at the height of the boom, the median expected home price increase in Los Angeles was 10% for the next year, and 9% a year for the next decade. Clearly, these were very strong expectations, and such expectations appear to have contributed to the boom itself, because it enticed people to buy properties in anticipation of making a lot of money in capital gains.

In 2007, the median expected home price increase in Los Angeles was 0% for the next year, and 5% a year for the next ten years. As such, expected price increases are weakening, but they are not gone yet. It is not clear whether the boom has come to an end; there is still investor enthusiasm out there.

Meanwhile, the Standard & Poor’s/Case-Shiller Home Price Indices which Case and I pioneered are now showing price decreases in most cities. This raises a question of how long expectations of increase can co-exist with falling prices.

In May of 2006, the Chicago Mercantile Exchange launched futures and options on our indices for ten U.S. cities, with a maximum horizon of one year. In September, the horizon will be extended to five years. We will then have a clearer picture of market expectations for home prices. For now, it is worth noting that the market is predicting home price decreases between 3% and 8% for the next year.

Should this matter to home buyers? Certainly. Buying a large house with a mortgage can be a devastating move if home prices fall by more than the down payment; all home equity could be wiped out. On the other hand, people need to live somewhere, and most are not happy with renting. They need to buy a house and get on with their lives.

Some of these people might consider hedging the home price in the futures or options markets, though any such move is complex and should be done only with the advice of a competent financial advisor.

Lawrence Yun:

We would advise your readers to visit the N.A.R. website to see our research on the housing market. All real estate is local, and there are many local variations.

As to the bubble, quite a number of local markets have not seen any price decline. The “correction” has been in home sales, mortgage lending, and new home construction, all of which are all down significantly. Some bad lenders have gone bankrupt, and aggressive hedge funds are hurting as a result — and I, for one, do not care. What I do monitor carefully is a factor that matters to consumers and homeowners: home prices. The national median price was 1.1% lower in the second quarter of 2007 than its comparable period the year before. That drop comes after a more than 50% rise in home values during the boom. If people want to call the 1% price decline a bubble collapse — well, everyone has an opinion. I believe that homeowners who are in it for the long term will do well. The Federal Reserve data show that the typical median wealth holding is $184,400 for homeowners, versus only $4,000 for renters. That, in my view, is quite compelling.

David Lereah:

Bubble is the wrong imagery for today’s housing markets. Bubbles inevitably “pop.” A more useful image for the housing markets is a balloon. Balloons expand and deflate. It is clear that air has come out of a number of local balloons across the nation, particularly in California, Nevada, Arizona, Florida and some selected metropolitan areas in the Midwest and Northeast regions. From a home sales perspective, the magnitude of today’s real estate downturn is not meaningfully different from our two most recent real estate downturns – 1990/91 and 1980/81. For example, the 80/81 recession resulted in a 48% drop in existing home sales. Existing homes sales have dropped by less than 20% so far in the 2006/07 downturn. However, unlike real estate recessions in the past, today’s downturn offers two unfortunate residuals – a drop in home prices for the nation as a whole, and a serious run-up in foreclosures.

If a national bubble had burst, the nation would have experienced a meaningful double-digit drop in home prices. To date, we are experiencing maybe a 3 to 4% drop, at most. But for some post-boom metros like Las Vegas, Miami, and Phoenix, double digit price drops are not out of the question. So the answer is that there have been some local housing balloons that have popped, but no national balloons.

How much should the average American care? If you purchased property in 2005 or 2006 in one of the “booming” metros that have now gone bust, you care a great deal, because you have most likely lost equity in your property. But home prices appreciated 34% during the 2002 – 2005 period; as such, even a 5 to 10% national price drop will not meaningfully impact most homeowners, since they have built up a sizeable amount of equity in their primary residences.

Barbara Corcoran:

There’s a hell of a lot of noise out there right now that would scare anyone away from buying real estate. Not me. I’m yahoo-ing, low-bidding, and snatching up deals wherever I can find them. I understand the two big truths about real estate investing:

1. Everybody wants what everybody wants!
2. Nobody wants what nobody wants!

So until everyone else decides (always at the exact same moment in time) that the worst is over and it’s safe to invest, I’m grabbing as many over-priced, over-stuffed, and over-rated homes as I can get my greedy little hands on.

Aviv Nevo:

I don’t know if it is time to believe in a housing bubble, and, frankly, I am not sure the average American should care. Let me explain. Anyone considering buying or selling a home any time soon should care about future prices. If you are thinking of selling, you should wait if you think prices are going to go up. If you are buying, you probably want to do so sooner, and maybe offer a higher price if you expect prices to rise. So, clearly, what you think about future prices is important. However, even if there is a chance to time the market — and I am not sure there is — I doubt the average consumer has the flexibility or forecast ability to consistently take advantage of it by timing the purchase or sale of a home. Of course, some homeowners are going to be lucky, and some less fortunate. But for the average American, there is little to be done except worry.

On the other hand, there are other ways that consumers can increase their gains from real estate dealings. The most obvious is to avoid using realtors. That’s a 6% savings right there. (Despite what realtors would have you think, there is no credible evidence that they get you a higher price.) My guess is that, given the constraints most consumers face, the 6% in saved commissions is more than the average person could gain by trying to time the market.

Amir Korangy:

Ah, the age old question. Short answer: no. In various markets around the U.S., prices have appreciated in a huge way; but this doesn’t necessarily mean we’re experiencing a bubble. Real estate prices are a local phenomenon based on employment, industry, and other factors including climate, quality of education, cost of living, immigration, and crime. Therefore, if the concept of a national housing market is ultimately a false construct, there simply cannot be a national housing bubble.

As recently as 2004, there was a lot of media speculation about a housing bubble. Back then there was a slowdown, but not an across-the-board bubble. I wouldn’t forecast such an outcome occurring now in New York City. One contributing factor [to New York’s market strength] is the city’s popularity with the rest of the world, as well as the weak dollar, which has increased foreign investment.

Let’s talk about what a bubble is. A bubble exists when the ratio of median existing home prices is about 6 or 7 times greater than per capita income. If you compare the census with prices in New York, they seem reasonable. Bubbles have certainly existed in particular regions, and prices in those areas could be brought down by a range of factors. In 2005, when the entire country was experiencing tremendous real estate growth, prices in Canton, Ohio dropped continually. Drops like that contradict market fundamentals, increasing speculation and participation in the market by people who normally don’t get involved in such things … and, as a result, have a tendency to become a topic of popular discussion.

What Americans should worry about is the vast, across-the-board slowdown in residential property investment. Of the many scenarios that contribute to this, one that is already in play occurred when real estate-related jobs, which had been in tremendous growth mode, began to tank. As a result, we saw less new development and less stabilized prices. House prices can start to decline, making it harder for people to refinance their loans and causing a negative impact on consumer spending. This is how recessions begin. As such, it would be good if the Fed lowers interest rates soon.

A burst bubble would impact different cities differently. In places like New York City, which continues to attract tens of thousands of immigrants and has a healthy financial sector, prices could recover faster. Indeed, in that sense, a bubble (if that’s what you want to call it), is helpful because it helps to expand the number of units on the market.


Please add your full RSS feed back.. In case you didn't catch it in the Blogosphere.. I am not the only one who would like this.

Sanjay Nair

Please bring full RSS feeds back. Insert advertisements within the posts/feeds if you must.


Is it time to believe in Full RSS feeds? Ah! Now that's a great question.


I defer to the experts, but isn't there a risk of a ripple effect, where increased foreclosing hurts the stock market and general economy as well?- and what are the odds of a bailout, which rips off the average American?


Full feeds, please.


perhapse there's a bubble in the RSS feed


This was a really interesting post and deserves better comments than all the RSS feed comments. They are aware of the issue, guys. These things take time to fix. Whoever is moderating this, I would suggest not including comments that have zero content other than feed complaints, and post periodic updates about when the full feed will happen.


As someone who just bought a house (well, alright... just a condo), I am concerned about the housing market especially b/c there is a decent chance I will move in a few years.

But something that I can't understand is why absolute prices matter much at all for people who already own. If I move, shouldn't I just care about how my house goes up or down relative to a house I'm likely to move to?

If all houses decreased by $50,000, wouldn't selling my house and buying another be exactly the same as if they had all increased $50,000? In fact, if I upgrade to a bigger house (as most people probably do), wouldn't a 20% price drop across the board be GOOD for me since it'd decrease the absolute difference between my house price and the price of the new one?

If this is true, I'm encouraged, b/c I feel that I live in a market that isn't taking much of a hit. But I definitely wonder if I'm missing something, so please correct me if this is the case.



Unless something has really changed in the last five years or so, how can the current levels of real estate prices possibly be sustainable? Basically, who's buying all these houses, at these prices? People haven't gotten richer in real dollars (well, maybe they have, but certainly not by, say, 80% in the last seven years, which is what the "Irrational Exuberance" graph says has happened to housing prices.) At some point people are going to realize that it just doesn't make sense to pay these prices.

I think that the availability of "easy money" is what has driven the real estate price increases; people can get a lot more house for the same monthly payment than they used to be able to, and people think in terms of monthly payments. (At the very least, people entering the housing market for the first time think of it that way, because they're used to making monthly rent payments.) As the easy money dries up, the bubble will burst. Or the balloon will deflate; this might be the better imagery, because people just won't sell if they have to take a loss, so prices won't decline as quickly as, say, stock prices in the dot-com bust.



So is this a good time to be a vulture investor and buy a condo in Miami Beach? If so, what is the best source of info on distressed properties? lists over 8000 condos for sale in Miami Beach but I would like info about banks that have inventories of foreclosed properties or other lists of desperate sellers.

Rita: Lovely Meter Maid

I wish I could say something relevant here. I cannot. I could complain about the RSS feed, but I have no idea there either (and please. please don't enlighten me on this feed problem, for the love of sweet Jesus). Anyway, sooner or later, there will be a veritable bubble of relevant comments. Let's hope That is not followed by some nasty burst afterwards. I will say this: please stop buying homes (and designing homes) with those huge garages attached to them. That is rather disturbing for me to have to look at. It makes me think that, pretty soon SUVs are going to take over. Then they will buy their Own homes (garages) with houses attached to them. People will serve the SUVs in menial ways like getting them food (gas) and washing them alot. Will this help the housing problem? I can't say.


Was there really a need to include both past and current mouthpieces of the NAR in this article? Surely one eternally optimistic shill is sufficient to maintain balance.


In addition to full RSS feeds, please add a printable version of this page- I would like to print it out to read it on the train but IE 6 decided to hang when trying to print your complex page.


Mr Dubner,

Perhaps you approached the wrong experts. It seems that the impact of this bubble collapsing isn't going to be felt in the real estate market (which after all, has something "real" to sell), but in the derivative markets. To my unexpert eyes, the hedge funds and other "creative" investors realized that they couldn't get obscenely wealthy enough investing in "real" property. They created fantasy properties that were in theory based on real estate, but which were actually based on thin air. When the inevitable realization of their fraud set in, they were floating miles above the ground, like the Coyote who has just run off the cliff. Our big concern for today is that they will look for suckers to take the plunge for them, and unfortunately, at this poker table as at all poker tables, the sucker is likely to be the little guy.


About the RSS:

I know it's offtopic, but it's necessary. This is as good as a focus group as you're going to get. I know that since you've moved to NYTimes there is probably some corporate pressure to generate traffic directly on the site.

I'd say about 90% of professional bloggers use full-feed RSS.

If you don't choose to open back up RSS, that's fine. Just remember this :

Who is your customer? Your sponsors or your readers? Stop worrying about your readers and the problem will fix itself--no one will read.


Mr Yun's statement that "quite a number" of local markets have not declined is baffling when the S&P index shows 16 out of 20 markets have experienced declines (S&P/Case-Shiller® Home Price Indices, "July 31, 2007: Historical Values", 6 month period ending May 2007, which is the most recent available). Now there's a running battle between housing price deflation and the hollowing out of the dollar. Is it possible wider price and wage inflation will lessen the pain of decreasing house values?


#15: The advertiser/sponsor is the customer. We (the readers) are the product. You see, in the business world, the customer is the one with the money that he/she gives to the seller in exchange for something. (The point about losing readers is valid, though. The authors do need to have a product to sell.)


Rita's comment (#11) on SUVs building their own homes reminds me of the character Ford Prefect from Douglas Adams' Hitchhiker's Guide series (who supposedly got confused about which was the dominant life form on earth when he picked a name). A bit less humorously, I'm also reminded of a section of Carl Sagan's book Pale Blue Dot, in which he talks about how from far away it would look like cars were the dominant life form, except that every so often these strange little parasites (humans) enter the cars, and cars only move when they contain at least one such parasite.

Broke Broker

It seems to me that Mr. Korangy, had the most to say with the most amount of facts to support what he was saying. His logic makes me lean towards believing, though its extremely hard to believe that there is no bubble. But his reasoning for his point seems most valid. Thank you. P.s, for crying outloud get the RSS feed working, Dubner.


to anon #8:

You asked: "But something that I can't understand is why absolute prices matter much at all for people who already own. If I move, shouldn't I just care about how my house goes up or down relative to a house I'm likely to move to? If all houses decreased by $50,000, wouldn't selling my house and buying another be exactly the same as if they had all increased $50,000?"

absolute prices matter because so many home "owners" now have zero or very little equity in their homes. if you recently bought your home for $250,000 with 10% down (or no money down, as is common nowadays), and the price dropped $50,000, then you now owe substantially more than the home is worth. you can only sell it if you can come up with enough cash to make up the difference (including realtor commissions). in effect, you're priced *into* the market. that's the exact situation that millions of people with zero-down, negative-amortization and other exotic loans now find themselves in.