A economist at Yale, Robert Shiller, compiled an index of housing prices since 1890 in an attempt to determine what caused the housing bubble (click to enlarge):
The figure is from here. (Hat-tip: Cafe Hayek)
I post this figure because I think it dispels a couple of delusions I hear people quoting about the housing bubble.
1) There have been several housing bubbles in the past followed by corrections. They were just not as big as this one.
2) Look at the year for the beginning of the meteoric rise in housing prices. 1997. Bush didn't create this alone. He likely participated in it and did very little to stop it, but he didn't create it. Thus, articles of this nature are what we like to call in America: s&^* on a shingle. If you are looking to put the housing bubble squarely on a single President's shoulders, you should be looking at Clinton not Bush.
In truth, encouraging home ownership has been a multi-Presidential sin with Congressional complicity going on for decades. There is plenty of blame to go around in this, so I think it is pretty short-sighted to focus on a single actor.
3) There were many, many reasons for the rapid rise in housing prices. You have to ask, what set of factors were present in 1997 that caused this sea change?
There are four factors that helped drive up the price of real estate in the United States and create the housing bubble: The GSEs (Fannie and Freddie), the Community Reinvestment Act, expansionary monetary policy starting in 2001, and the 1997 Taxpayer Relief Act that for the first time let people avoid capital gains on home price appreciation without having to rollover the gains into a bigger house. (Links added.)
More from them here. To that, I would actually also add a fifth: cheap, foreign money looking for a place to invest, particularly from China.
For me, the conclusion from these data is that the housing bubble was caused by a combination of both government and market failure. For certain, some lenders behaved greedily. But they behaved greedily with the complicity and sometimes at the prompting of government policy -- either in the form of loan guarantees or a policy of overly cheap money.
We will have learned nothing if we attribute this this problem to a single cause.
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The Y-axis is misleading if you don't look at the numbers. Because it begins at 60,000 rather than zero, the drop between the wars and the recent increase both look more dramatic than they were.
The development of the investment market in mortgage backed securities and related derivatives had much more to do with it than the CRA. At one point, brokers pushing mortgages of every stripe from zero down to no credentials were a major source of email spam. They weren't doing that because CRA required it. They were doing it because the secondary market made it very profitable.
If you extend this back to 1997, you have two more bubbles to explain as well as why they ceased before growing without bound. That break does occur with Bush. If you want to explain it on the basis of policy, you also have to explain why there were also bubbles in most English speaking countries as well as Spain. CRA has been around since 1977 and did not apply to the investment banks making it a lame excuse although I would not excuse the move to undocumented lending. Bush's clamping down on Frannie likely made it worse by driving lending to less regulated channels.
Finally, one shouldn't accept that housing should be flat regardless of history. A national house doesn't exist. Over the course of the 20th century, transportation was developed that limited prices rises. Towards the end of century the outward expansion of metropolises was no longer effective due to their size and congestion and this along with more people living in metro areas is what really drives price increases. Prices were remarkably low in 1997, not 'normal'.
"In truth, encouraging home ownership has been a multi-Presidential sin with Congressional complicity going on for decades"
Is it a sin at all? You're assuming that it causes housing rice increases. And the CRA and various home ownership bills keep being propped by the hard right as causes for this crisis. Given the track record of the farkers, that alone is cause for doubting it. And indeed when you put 2 and 2 together you realize that there is nothing special about those wrt house prices.
I put forth (well I'm not the first one) the assertion that tax cuts on the wealthy are the main cause for housing price inflation. Think about it. Imagine you have plenty of cash. You already have a Ferraghini. Your current yacht is big enough. You have quite a bit invested in stocks. What do you do with an extra $100k? Buy real estate.
The Annual Demographia Surveys (www.demographia.com of the major urban markets of the English speaking world - the US, Canada, United Kingdom, Ireland, Australia and New Zealand - clearly illustrate that some markets "bubbled" while others did not.
the urban markets that bubbled are constrained by local land use regulations - starving land supply on the fringes.
Why did California bubble out to 9 times annual household earnings, LA in excess of 11 times, while Texas and most of middle North America stayed faily constant at 2.5 times annual household earnings?
Bubbles don't occur only in price. In the hinterlands, they occur through overbuilding since ample land is available. This is usually the more economically costly since the resulting structures have no use. Land use regulations are what make the coastal areas livable; without them the quality of life would diminish until growth was driven away. Land is always in limited supply in these moderate climate areas.