Strong opinions, weakly held

Credit where it’s due

It’s interesting to see price-rent ratios flagged everywhere as the clearest sign that we were in a housing bubble over the past decade or so. It reminded me that the first place I saw this indicator mentioned was at Winterspeak.com in January, 2004. The post is about Boston housing prices, but the metric applied in many markets. Just goes to show you that the housing bubble was never a mystery to those who were paying attention.


  1. I saw an article in a London paper at least 5 ago graphing house prices against incomes, going back to the early 70’s. It showed a very dramatic boom and bust cycle, and if you drew a line across the peaks, you could see that the current (at the time) ratio was in line with the peaks. I guess the fact that the bubble carried on for years after this, going well over any previous peak, was due to interest rates being at record lows compared with previous crashes.

    I brought this graph up in conversation for years, almost always getting polite nods, followed by arguments that house prices can’t possibly go down, much like the dot-com bubble ‘new economy’ (only goes up!)

    It’s funny that I’m now on the other side. I’m amazed at the number of people declaring that prosperity is gone forever, economic ruin is here to stay, ‘end of capitalism’, etc.

    People were saying the same thing in the (comparatively mild) recession of the early 90’s – I distinctly remember pundits declaring that we (me being a recent college grad) would never earn as much as our parents, and we’d all have to get used to a more austere life.

    Is the economic cycle really an arcane concept that people can’t grasp? Whatever the economic climate of the moment, people seem convinced that it’s the new, permanent state of things.

    The 30 year house price / salary graph I mentioned also showed, despite the dramatic ups and downs, a distinct upward trend. Hmm.

  2. One thing that’s becoming apparent is that any economic growth the US experienced over the past decade was an illusion. Real incomes did not go up — all of the expansion was funded by the withdrawal of equity by homeowners.

  3. Kief,

    While I think that we as a country were on an unsustainable path, I agree with you on the “experts”.

    When things were going well, they drew a graph, connected the peaks, extrapolated a line into the future, and proclaimed that things were golden!

    Now they do the same thing on the downside!

    It’s just a reminder that most of these “experts” should be ignored.

  4. Huh, I think I saw that notion out here in northern California back into nearly the late ’90s; that it was absurd that you could pay $1400 a month to rent a house that’d sell for $600k, ’cause money costs six or seven hundred bucks per hundred thou per month. It was really only in 05 or 06 that rents started going up.

  5. But now I am seeing the problem, especially on the East coast, where rents are staying high and not dropping along with housing prices.

    With the economy surely heading towards the shitter, it’s going to become harder and harder to afford the rents currently being charged. It’s not just homeowners who will be struggling.

    This is especially true because the job market is getting pretty bad, and the only jobs available are offering 30% to 40% less salary than they were a year ago. Pretty hard to keep a level cost of living if you suddenly are making 40% less but your rent does not drop accordingly.

    And with so many people losing their houses, they’re being pushed into the rental market, which keeps demand high which in turn keeps rents high. It’s a vicious cycle.

  6. As Rafe points out, the key point is real income. If people aren’t making more money, it’s impossible for housing prices to rise outside a certain affordability window. The bubble was built on increasing leverage at every step of the chain, from the CDS and securitization people to banks to homeowners whose only equity was the theoretical future increase in home value.

    Tons of people realized this was a problem, but I don’t think anyone recognized how deeply into all other aspects of the economy this particular bubble had reached.

  7. I do worry that rents are going to be high because of growing demand for rental units and a lack of supply. There are lots of foreclosed homes, and lots of “condoized” apartments, and not enough rental units available for the people who are getting kicked out of the houses that are in foreclosure. I think now is a darn good time to be in the home rental business.

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