When is a Housing Bubble a Bubble or Not?

Dean Baker (right; Co-Director, Center for Economic and Policy Research) and Jed Kolko (left; Chief Economist, Trulia) see things differently concerning the current real-estate-housing market and whether a bubble is, or bubbles are, forming or wil do so in the near future if the pace of price increases continues much longer. (See: Are U.S. home prices rising at unsustainable levels?.)

This “debate” has been heating up over the last couple of weeks. Understand that from Trulia’s perspective, it behooves them that non-bubbles be seen as such so that buying and selling will continue. Provided Trulia can adequately compete with its online competition, such a Zillow for one, an active housing market is better for Trulia’s bottom line. Trulia has a real perceived need to beat down erroneous arguments concerning forming bubbles. However, we see a lack of adequate definitions out there. What is a housing bubble?

We have no reason to believe that Jed Kolko is being disingenuous. We aren’t even suggesting that pro-housing-market activity is consciously biasing his thinking, research, or stated and published analysis.

Jed Kolko is using longterm trend-lines upon which to based his work. The issue, the “debate,” as we see it, arises when real-world, real-economy circumstances at least temporarily alter the trend lines so that a new normal prevails at least for a good part of a generation (upwards of 20 years for our purposes here).

We’re already 5 or so years into the Great Recession and slow “recovery.” Middle-class buyers are fewer but housing inventory hasn’t even kept pace with the shrunken pool of buyers. The market is working on that; but even if, or when, inventory recovers, we need to consider a few things.

When it recovers, will unemployment remain high or loan requirements remain at high standards and therefore keep buyers low while inventory perhaps rises enough to lower current prices down well below Jed’s long-term trend line? Also, bubbles are not clearly demarcated and agreed upon things. They are not suddenly there or not as prices cross some set percentage (say 40%) clearly above the long-term average. It can be argued that a bubble is anything above the trend albeit tiny to start with.

So, there’s merit in both Dean Baker’s and Jed Kolko’s views, but we need the terms defined before we even begin to say whether there are bubbles forming and be able to not be needlessly speaking at cross-purposes.

Here’s the heavy-action article: “From Brooklyn to California, Housing Bubble Threat Grows,” by Prashant Gopal & Kathleen M. Howley. Bloomberg.