A frequent complaint I hear about the crisis is: How did economists and policymakers miss this? How did a crisis so severe sneak up on us when the (supposed) excesses of the bubble made it inevitable?
Here is a great graph from Leonard Kiefer of forecasts of housing starts since the late 1990s.
Even as far back as the late 1990s, the median forecast was for declining housing starts. At that time, housing starts had only just recovered enough from the declines of the early 1990s to get back up to long term averages. Yet, the consensus was already looking for a downturn. And, of course, even today, you frequently see people claim that they called the bust as early as 2002 or before.
Calling the bust in 2002 was the consensus! That's why so many people feel vindicated by the bust. Most people were calling it, and markets kept defying them.
The problem wasn't that nobody saw a bust coming. The problem was that there was no need for a bust, but the country had been so bound and determined that surely one was due, that the market's defiance of that expectation in 2004 and 2005 created extreme expectations. If a bust was due in 2000, imagine how much we needed a bust by 2005! And, not only had housing starts continued to rise in defiance of expectations, but prices did too.
So, when that terrible collapse started in 2006, the collective reaction was not a demand for stability. It was a collective demand for letting nature take its course. Finally, years' worth of expectations were vindicated. And, the delay it took in coming meant that it might take a mighty correction to unwind the excesses that surely had built up over time.
Even after all that has happened, and after a decade long over-correction, this still appears to be the bias. I expect that we will see downward expectations again before homebuilding ever reaches a sustainable level again. We already see reports of overheated markets in the Closed Access cities, where housing starts that can't even accommodate natural levels of population growth look like building booms to locals who have spent a generation or more in deadened cities. And the high prices caused by the housing shortage only seem to them like further evidence of a mania.
Great post.
ReplyDeleteA couple off-the-wall ideas from me:
1. Is a national property tax a bad idea? Obviously, the income tax is rife with problems, not least determining what is income, then can income be hidden (offshore bank accounts), and why tax productive behavior anyway?
Oddly enough, we hear about border adjustment taxes, VAT taxes, and we endure heavy payroll taxes (which are taxes on working and hiring. Oh, that makes sense).
Unless I have missed it, a national property tax is never discussed. At first blush, seems like a good idea.
2. This one nearly gives me a headache: Hedonics and housing costs. As you probably know, the BLS went to hedonic pricing sometime back, including on housing.
As applied, does this result in lower inflation (as measured) in housing?
Yes. I think property taxes are a good tax, though without adjustments, they are somewhat regressive in practice. One advantage is that it mathematically makes the government a part owner of the property. Home ownership requires a lot of involvement of the finance sector, and there are deep seated prejudices that it seems people will always have about finance. In a financial crisis, with higher property taxes, tax liabilities would end up being what pulls many households under water, so they would owe debts to the government instead of to a bank. This is probably worse for the individual households, but the public won't go bonkers about it like they do when there are a lot of bad debts to the finance sector. Maybe we wouldn't end up with as many poor policy outcomes when crises occur.
DeleteGreat question on inflation. I don't know what the effect is. Interesting.
https://www.cnbc.com/2014/03/06/why-china-needs-a-national-property-tax.html
ReplyDeleteIt amazing how many millions of people there are in the United States, and how limited discourse is.
A while back you mused, "Why is Kevin Erdmann the only guy pointing this out?"
After a google, I see that a national property tax in the U.S…..is never a topic. Maybe for China, and that fleetingly.
A national property tax ranks up there with decriminalizing push-cart, motorcycle sidecar and truck vending. Simply not discussed.
- There was one guy who predicted already in the very late 1990s that housing would started to fall in 2003. That was one Harry S. Dent. His prediction was two years too early because it happened in 2005.
ReplyDelete- Dent also predicted the crisis in 2008-2009 in the earlt 1990s.
- these two predictions were based on demosgraphic patterns he discovered in the 1980s.