Housing Bubbles Are Few and Far Between - Commentary by Robert J. Shiller
"Housing Bubbles Are Few and Far Between"
By Robert J. Shiller
Published in the New York Times on February 6, 2011
Read the article in its original context on the New York Times website.
What’s the outlook for home prices over the next decade? It’s not easy to tell. We need to confront the basic fact that near the beginning of the 21st century, the market for homes in much of the world suddenly became more speculative than ever.
This enormous housing bubble and burst isn’t comparable to any national or international housing cycle in history. Previous bubbles have been smaller and more regional.
We have to look further afield for parallels. The most useful may be the long trail of booms and crashes in the price of land, particularly of farms, forests and village lots. Those upheavals may give some insights into the present situation, and some guidance for the next decade.
In the 19th century and most of the 20th, speculation in land was a powerful phenomenon. There was little speculative activity around homes, however, which were usually viewed as rapidly depreciating assets whose value was to be found almost entirely in physical buildings, not the land beneath them. Eventually, the buildings were expected to be torn down and replaced, so there was little bubble psychology for housing on any large scale. People generally didn’t think about housing as an investment.
But they knew that land was fixed in quantity and would last forever, and many believed that as the economy grew and more people were born, there would be ever-increasing demand. The speculative imagination could be easily fired by reflecting on the huge population that would consume the food from this land or settle on it in future years.
There have been many highly localized land price bubbles in the United States over the last couple of centuries, although bubbles over large areas have been rather rare. Those with the biggest national impact were in the 19th century, when speculators found opportunities that had been created by government land sales and by shifts in land prices set off by construction of canals and railroads. Stories of fortunes in land speculation captured the imagination, and led to bubbles. (That is typically how bubbles form, by titillating the public imagination.)
Two such land bubbles stand out. The first, in the 1830s, was associated with federal distributions to state banks and the loss of fiscal restraint that had been imposed by the short-lived Second Bank of the United States. People began to think farm prices could never fall. As an article in a publication called The Cultivator said in 1836: “Who ever heard of a man buying and selling a farm at the same or a lessened price? It is so well understood that the seller is to have more than he gave, that it has almost become a settled principle in the purchase of real estate.”
The bubble burst with the Panic of 1837, and was followed by the first great depression in United States history, from 1837 to 1843.
A second bubble, in the 1850s, was encouraged by an 1852 act of Congress making land warrants tradable. It burst with the Panic of 1857. Some historians — notably James L. Huston of Oklahoma State University — say they think that the resulting tensions escalated sectional animosities and helped precipitate the Civil War, which ended the depression.
The entire 20th century appears to have had only one farmland bubble of national significance — it occurred in the 1970s. Its causes were complex, but it seems to have been accompanied by a newly common belief that the human population would soon become excessive. A widely cited Club of Rome report in 1972 predicted famines induced by overpopulation. In any case, that bubble burst after the Federal Reserve clamped down on credit in the United States, effectively producing the recessions of the early 1980s.
So land manias have been rather infrequent, many decades apart. They suggest that the recent housing bubble is a similarly rare event, not to be repeated for many decades.
But, of course, the relevance of this long history isn’t entirely clear. In contrast to the 19th century, when the business cycle proceeded without much constraint, we now have the Fed and an active government housing stabilization policy, both of which mitigate the cycle’s more extreme effects. And now, the Dodd-Frank law has created a Financial Stability Oversight Council, which is supposed to go even further to prevent instability.
Ultimately, bubbles are impossible without extreme public enthusiasm. Opinions about housing seem to change in rather trendy ways, but investor enthusiasm for housing has now been down for more than five years — a decline that started well before the collapse of the housing bubble in 2007.
With Karl Case of Wellesley College, who developed the S&P/Case-Shiller Home Price Indices with me, I have been surveying opinions of home buyers in the United States on and off since 1988. We have found a fairly steady downtrend since the early-to-mid-2000s in a number of speculative attitudes. On questionnaires, people are less likely to report that they think of housing as an investment, or to express the view that real estate is the "best investment."
As an investment, in fact, they are more likely to see housing as risky. Although they still have solid expectations of home price increases over the next 10 years — a median of 5 percent annually, in nominal terms — those expectations have been declining and are not nearly as extravagant as they were before the market peak.
It will take a while for the housing market to recover fully. Still, many people continue to think of housing as an investment, and so it does seem that we are in danger of encountering another whopper bubble someday. Even so, both the history of land bubbles and the slowness of shifts in public opinion suggest that such bubbles will be fairly rare.
Add the new policy restraints, and a new national housing bubble looks even less likely anytime soon.
Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.