Per recent housing price discussion, a new study highlights three key
factors that distinguish the current pruce surge and the traditional
housing price cycle -- indicating a potential bubble.
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Study cites recent trends that signal housing bubble
Washington, DC - Recent trends in the housing market suggest a
dangerous housing bubble, rather than a run-up caused by fundamental
factors such as higher incomes and population growth, according to a
new study by the Center for Economic and Policy Research (CEPR).
The report, "Will a Bursting Bubble Trouble Bernanke? The Evidence for
a Housing Bubble," cites three trends in the housing market that
suggest an unsustainable increase in house prices: 1) A sharp
divergence between house sale prices and rents; 2) An extraordinary
jump in the rate of housing construction; and 3) A sharp decline in
the savings rate, driven by a housing wealth effect.
Federal Reserve Board chairman nominee, Benjamin Bernanke, has argued
that there is no housing bubble and, therefore, no reason for the Fed
to take action to address the bubble. Bernanke's approach raises grave
risks, since the impact of a bursting housing bubble is likely to be
even greater than the collapse of the stock bubble. The collapse of
the housing bubble will throw the economy into a recession, and quite
likely a severe recession, according to economist Dean Baker,
co-author of the report.
"If the Fed chooses to let a housing bubble expand unchecked, the
eventual cost to the economy and millions of American families could
be enormous," said Baker.
The report, by Dean Baker and David Rosnick, found three housing
patterns that are tell-tale signs of a housing bubble:
*
A sharp divergence between house sale prices and rents. If house
sale prices were pushed up by fundamentals in the housing market, it
would be expected that rents and house sale prices would rise together
-- but they are not. The house price index has increased by an
unprecedented 51 percentage points more than the rent index since 1997.
*
A high rate of housing construction. The rate of housing
construction over the last three years is more than 40 percent higher
than it was in the 17 years prior to the run-up in house prices. This
is not caused by the increase in the U.S. population, since the most
rapid growth in the number of new households actually took place in
the 1970s and early 1980s, when the huge baby boom cohort was first
forming their own households.
*
A sharp decline in the savings rate. If house prices move at
approximately the same pace as the overall inflation rate, as was the
case prior to 1997, then housing wealth will have little effect on the
savings rate. However, in the last eight years, house prices have
outpaced the overall rate of inflation. The resulting wealth effect
has depressed the savings rate, which has actually turned negative in
recent months.
For the full report see: "Will a Bursting Bubble Trouble Bernanke?:
The Evidence for a Housing Bubble."
The Center for Economic and Policy Research is an independent,
nonpartisan think tank that was established to promote democratic
debate on the most important economic and social issues that affect
people's lives.
1611 Connecticut Ave., NW Suite 400 Washington, DC 20009
Tel: 202-293-5380 | Fax: 202-588-1356 | www.cepr.net
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