FacebookTwitterRedditEmail

Pierce the Housing Bubble

Virtually the entire economics profession insisted on ignoring the housing bubble as it expanded to ever more dangerous levels. Remarkably, even after the bursting of this bubble wrecked the economy and has given us the worst downturn in 70 years, most economists are still determined to ignore the bubble.

The basic story is very simple. For a hundred years, from 1896 to 1996, nationwide house prices just tracked the overall rate of inflation. This is a very long period in a very big market. If we see a trend like this persist for a hundred years it is reasonable to expect it to continue into the future, unless something big in the fundamentals changes. And, no one has produced any evidence that passes the laugh test that anything in the fundamentals of the housing market has changed.

This means that we should expect house prices to continue to fall, with nationwide prices dropping another 15 to 20 percent to complete the process of deflating the bubble. This price decline is inevitable and in many ways desirable. I don’t know why any of us would be happy if our kids had to pay more to buy their first house.

Trying to delay this adjustment process with schemes like the homebuyers’ tax credit were a pointless waste of money. Our government got millions more people to buy homes at bubble-inflated prices, ensuring that many will lose money when they sell. That is not good policy. Trying to sustain a bubble in the housing market is like having an agricultural price support program, except it is far more costly with far less benefit.

The housing bubble did support the economy prior to the recession. We will have to find alternative sources of demand to replace the demand generated by over-valued housing.

It is actually easy for economists to think of ways to generate demand. We can have public jobs programs, we can rebuild the country’s infrastructure, we can have tax cuts oriented towards low- and middle-income people who will spend the money quickly.

We can also have the Fed be more aggressive with its monetary policy, targeting an inflation rate in the 3-4 percent range. We should also push down the value of the dollar to get our trade deficit down to a more reasonable size.

Unfortunately, all of these policies face serious political obstacles in Washington. However, the job of economists should be to explain the problem to policymakers and the public and to berate those who seek nonsense solutions like re-inflating a housing bubble.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

bernie-the-sandernistas-cover-344x550
Weekend Edition
July 19, 2019
Friday - Sunday
Rob Urie
The Blob Fought the Squad, and the Squad Won
Miguel A. Cruz-Díaz
It Was Never Just About the Chat: Ruminations on a Puerto Rican Revolution.
Anthony DiMaggio
System Capture 2020: The Role of the Upper-Class in Shaping Democratic Primary Politics
Andrew Levine
South Carolina Speaks for Whom?
Jeffrey St. Clair
Roaming Charges: Big Man, Pig Man
Bruce E. Levine
The Groundbreaking Public Health Study That Should Change U.S. Society—But Won’t
Evaggelos Vallianatos
How the Trump Administration is Eviscerating the Federal Government
Pete Dolack
All Seemed Possible When the Sandinistas Took Power 40 years Ago
Ramzy Baroud
Who Killed Oscar and Valeria: The Inconvenient History of the Refugee Crisis
Ron Jacobs
Dancing with Dr. Benway
Joseph Natoli
Gaming the Climate
Marshall Auerback
The Numbers are In, and Trump’s Tax Cuts are a Bust
Louisa Willcox
Wild Thoughts About the Wild Gallatin
Kenn Orphan
Stranger Things, Stranger Times
Mike Garrity
Environmentalists and Wilderness are Not the Timber Industry’s Big Problem
Helen Yaffe
Cuban Workers Celebrate Salary Rise From New Economic Measures
Brian Cloughley
What You Don’t Want to be in Trump’s America
David Underhill
The Inequality of Equal Pay
David Macaray
Adventures in Script-Writing
David Rosen
Say Goodbye to MAD, But Remember the Fight for Free Expression
Nick Pemberton
This Is Heaven!: A Journey to the Pearly Gates with Chuck Mertz
Dan Bacher
Chevron’s Oil Spill Endangers Kern County
J.P. Linstroth
A Racist President and Racial Trauma
Binoy Kampmark
Spying on Julian Assange
Rose Ramirez – Dedrick Asante-Mohammad
A Trump Plan to Throw 50,000 Kids Out of Their Schools
David Bravo
Precinct or Neighborhood? How Barcelona Keeps Rolling Out the Red Carpet for Global Capital
Ralph Nader
Will Any Disgusted Republicans Challenge Trump in the Primaries?
Dave Lindorff
The BS about Medicare-for-All Has to Stop!
Arnold August
Why the Canadian Government is Bullying Venezuela
Tom Clifford
China and the Swine Flu Outbreak
Missy Comley Beattie
Highest Anxiety
Jill Richardson
Weapons of the Weak
Peter Certo
Washington vs. The Squad
Peter Bolton
Trump’s Own Background Reveals the True Motivation Behind Racist Tweets: Pure White Supremacy
Colin Todhunter
From Mad Cow Disease to Agrochemicals: Time to Put Public Need Ahead of Private Greed
Nozomi Hayase
In Crisis of Democracy, We All Must Become Julian Assange
Wim Laven
The Immoral Silence to the Destructive Xenophobia of “Just Leave”
Cecily Myart-Cruz
McDonald’s: Stop Exploiting Our Schools
Kollibri terre Sonnenblume
Our Veggie Gardens Won’t Feed us in a Real Crisis
CounterPunch News Service
A Homeless Rebellion – Mission Statement/Press Release
Louis Proyect
Parallel Lives: Cheney and Ailes
David Yearsley
Big in the Bungalow of Believers
Ellen Taylor
The Northern Spotted Owls’ Tree-Sit
July 18, 2019
Timothy M. Gill
Bernie Sanders, Anti-Imperialism and Venezuela
W. T. Whitney
Cuba and a New Generation of Leaders Respond to U.S. Anti-People War
FacebookTwitterRedditEmail