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.

Library Geek

The problem with declining real estate values, as I see it, is one can wind up upside down on a mortgage. That is, you could owe more than your condo is worth in a couple of years. Thus, when you go to sell -- you won't be able to recoup your costs. Now, if your house is (largely) paid for then the only direct impact as far as I can see is that home owners won't get the large 2nd mortgages and lines of credits that have become common.

Boo Radley

They say if you sit down at a poker table and can't find the sucker at the table that it's probably you. Ms. Corcoran, take a look around; see any suckers?

Ranjit Mathoda

I wrote an analysis in September of 2005 about a possible housing bubble that you may find of interest:


Don't let the percentages fool you. A percentage decrease after a percentage increase has more impact then the original increase.

i.e. If you bought a house in 2002 worth $100,000 and it increased by %30 by 2004, then the value would be $130,000. However, if by 2007 the value had decreased by %30 you would have a house worth $91,000, because it's %30 of $130,000 not the original $100,000.


We haven't seen any bubble-bursting. Bubbles burst when there are REAL BIG losses, not the moderate 3-8% average declines Schiller predicts [or the optimism of Yun].

I sold my father's house this month. As it happens, there's a direct comparable across the street and 3 houses down, which was sold in 2004 for $161,000. I got $169,000. That's not a "bubble burst" price. There's a lot of inventory there and a lot of liquidity worries in the mortgage market, but nothing like "bubble bursting" [anybody own lots of internet stocks in 2000?].

There's a threat of the bubble bursting and prices returning more to "normal". Schiller's 1890-to-the-present graph is sobering. But it hasn't happened ... yet.

Schiller's scary graph:


Mr Mathoda,

What other predictions are you making? While you didn't specifically call out the subprime component of today's troubles, I'd say your predictions were quite accurate.

Good Call!


Robert Shiller states:
"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."

How is this practical and how could this help the average homeowner who wants to lock in their profits?

If I bought a house in LA in 2000 for 400k and it is now worth 900k, how would I lock in those profits on the CME? Am I right in thinking that I would sell short 4000 contracts at $250 each for a total of $1mil of capital that I would need to come up with? Doesnt seem right, perhaps you or someone else could explain it to me.


As for being underwater on the mortgage, that sounds like it's primarily the lender's problem.

Tom Kelly

I am surprised that none of your experts talked about the ratio of home prices to household income. My extended family members, who live in high home price areas, could not possibly afford to buy their houses at today's prices on the incomes they earn.

In the big picture, we can only afford houses based on what we're earning now or have earned in the past. A lot of those previous "earnings" have come from inflated house prices.

Look out below.


Regarding Shiller's now infamous graph of housing since 1890, one question: Why 1890? What if you were a real estate economist in 1950 and saw this graph:
(Using Shiller's data from here: )

andy alexander

I would go so far as to say that every new york times blog should be full feed. That is, new york times, if you want more people to read your content. this will be the last time i read freakonomics or bits if it does not happen.


First, a house has two values - it's intrinsic (the cost of goods to build it) and it's extrinsic (the juice that someone is willing to pay over the intrinsic value). The instrinsic value hasn't changed, only peoples perception.

The sad truth is not the housing bubble, but the massive credit line that has been extended. The fed rates at 1% spurred the house buying frenzy. People are on short-term / interest only. The default rate is up. And their is a RACE to Liquidity.

The real fear - is can the banks and lenders carry trillions in debt. The answer is NO!

Secondly over 100 mortgage companies are out of buisness and now CountryWide (the worlds largest mortgage company is about to file bankruptcy).

Reality - doesn't matter what you THINK! Follow the money to the truth. And the truth is, if it's so great and only a small "deflation" then why is almost every mortage company going out of business? Because people are DEFAULTING!

Also - remember the people that "half dozen bright people" that were asked that question?
Lawrence Yun, chief economist of the National Association of Realtors
Barbara Corcoran, the real estate maven and autho;
Amir Korangy, founding editor of the very good New York City real estate publication The Real Deal.

Yeah, right. They maybe bright - but what do you think they are going to say. They have a VESTED INTEREST in seeing that YOU the reader believe this is the bottom and you should get in. That there is NO BUBBLE!!!

Believe's going to get worse!

The housing market is only a piece of the puzzle.

We as consumers and a government can only borrow so much for so long.
And now the Piper is here to collect - and NO ONE CAN PAY!

Good luck to those that bought thinking they are a real estate investor now...Hopefully it wasn't a interest only or some short-term paper...OUCH!!!

Look out below....

Next time get some people worth asking, not a bunch of real estate agents, investors, and marketing people that have invested interest.



This is sarcasm right? I mean the market is getting hit HARD, several mortgage companies are out of business, the debt load is massive, the biggest run to short-term treasuries occured today (4 standard deviation move), default rates are hitting record numbers, and you ask 5 "bright" people who are in real estate what they think?

Ha ha ha ha ha...

Yeah...they are going to say...there's no bubble, maybe a small problem here or there...

This is got to be the most sarcastic Freakonomics post yet. 1 actual economist and 4 realestate people. Is there a housing bubble? How about a MASSIVE BUBBLE IN THE CREDIT MARKET (thanks to the Fed lowering rates to 1% and creating the biggest wannabe bunch or real estate tards!).

There is a famous story where J.P. Morgan got out of his car on the way into NYSE Exchange and the shoe shine boy outside gave him a stock tip. As soon as he got in side the exchange he SOLD!!! Someone asked him why? He said when the shoe shine boy is giving tips, there is no one left to buy!!! (The shoe shine boy being at the bottom of the food chain - for those that don't get it).

Well, a couple of months ago I went in to buy a coffee at Starbucks and the coffee boy was studying. I asked him what are you studying? He was studying for his real estate exam!!! When the coffee boy thinks he knows the real estate market....well I think you get the point!

I hope you have hedged your bets, because it's not just the housing market that's going into the dumper! Good Luck and when the music stops I hope your not Holding a interest only house! Ha Ha Ha


Happily renting

As Michael just narrated, any discussion of housing is rearranging deck chairs on the Titanic.

Wall Street is, at this point, facing an insolvency crisis. Liquidity injections by worldwide central banks measured in the hundreds of billions have accomplished nothing other than stalling the inevitable.

The chief problem isn't at the house level. One of the large problems at the worldwide mortgage banks is the entire system by which the cash flows from (foreclosed-on) mortgages have been used as collateral for leveraged investments. what happens when a bank makes a margin call on a hedge fund with no assets other than MBS/CDO paper that obviously nobody is willing to purchase? Goodbye multi-billion dollar hedge fund!

The quant funds which were forced to unwind last week, taking tens of billions of dollars in losses, were equity-only funds. They had no exposure to MBS, yet they roached.

Bernanke is performing correctly, contrary to Cramer's stupid rants - if he drops the rate, the dollar inflates, which is actually worse.

Here's a fun thought exercise: what happens if all the CDO/MBS paper in the world is marked to today's market - that is, to zero ?


Henry Barth

The money the fed "injectred" into the banks was in the form of three day repos, to get throiugh a weekend.

There is panic in the market, not insolvency.

And have you noticed the Euro dropping like a stone this past week? From $1.39 on Monday to $1.34 on Thursday.

Apparently, the place to put your investment cash is still the US.


@28 wrote: "As for being underwater on the mortgage, that sounds like it's primarily the lender's problem."

Nope, not true. If you're underwater on the mortgage, you can stay in the house and keep making payments on an asset worth less than what you owe and pray that prices go back up before you have to sell. Or you can try to work with the lender and do a short sale, which might be reflected on your credit history and will also expose you to owing taxes to the IRS on the difference that was forgiven. Or you can stop making payments and let them foreclose, which will be reflected on your credit history and which might also have an affect on the interest rates you pay on existing credit card debt (read the fine print on the credit card agreements. Most say they can change your interest rates if your credit quality declines).

There was a good story in the WSJ explaining the credit mess in gory detail titled "Credit And Blame:

A good blog that discusses the big picture economic issues, housing, credit, futures, etc. is here:

As to these posts about the RSS feed, I don't understand what the issue is. I use RSS heavily. Why does it matter if the full feed is posted or if you have to click once to go to a web page? I much prefer the short summaries myself. I can quickly decide if I want to read something. If not then I don't have to scroll a whole lot to the next entry.



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



And the moral of the story is, "do not buy things you cannot afford."


Here is a question right up your alley? Which came first; a) the slowing housing market or b) the slew of articles about the slowing housing market? Over the last 4-7 months, I have read front page articles in the NYTimes over and over and over about the "bubble." As I read, I always wondered; "are these articles contributing to or reporting on "the bubble?"


The bubble has been in the assumption of continually rising prices. Many economic decisions have been made on this assumption, and there may be severe consequences if the rise fails to occur.