Don't miss my latest writing for the Free Market Project: Media claims about a “housing bubble” are nothing new. Since before the 9/11 terror attacks, the media have been calling the housing market a “bubble” while predicting an imminent, devastating decline. Not only have they been wrong in forecasting such a top, they have thoroughly mischaracterized what an investment bubble is. Now that the market for homes has finally slowed a bit, the media are declaring the bubble has burst.
- A Bubble?: Fed Chairman Alan Greenspan has denied the existence of a national housing bubble for several years, but the media have used the term repeatedly.
- Strong Gains: The increase in real estate values the past five years has not resembled the rapid rise typically seen in a bubble. In 2000, the national median existing-home value was $139,000. This grew to $215,900 by the third quarter of 2005 – a 55-percent nominal increase but a 34-percent inflation-adjusted gain.
- Home Sales Still Going Up: New home sales jumped another 13 percent in October. While sales of existing homes were down 2.7 percent from September, the median national price rose to $218,000, a 16.6 percent increase since October 2004.
The media have been declaring America’s housing boom a “bubble” for more than four years. Now every new report on home sales is declared as more evidence that the bubble is bursting – even when the news is good.
On November 28, the National Association of Realtors reported existing-home data for October, and although sales were down 2.7 percent from September’s torrid pace, the median national price rose to $218,000, a 16.6-percent increase since October 2004. CNN’s Tony Harris on “Live Today” shared the news with his viewers: “Has the housing boom gone bust? Just in this morning, existing home sales fell in October more than 2 and a half percent.”
Almost on cue, the Commerce Department reported new home sales data for October on November 29, and last month’s data set a new record. As reported by Investors Business Daily, “Rumors of the death of the U.S. housing market must have been exaggerated.” What are the facts? “U.S. new home sales jumped by 13 percent in October to a record 1.42 million seasonally adjusted annual rate. This is the biggest rise since April 1993.” And, how do these numbers compare to others this year? “October sales smashed the previous record of 1.37 million set in July.”
As the report continued, the following statement stood out: “The sales figures seem to contradict anecdotal reports that the housing market has cooled dramatically as mortgage rates rise above 6 percent.”
Journalists have been talking about a housing bubble since 2001. On September 3 of that year, Forbes magazine warned its readers about the consequences of home equity values starting “to wobble,” while stating, “There are ominous signs that this is about to happen.” On the same day, a BusinessWeek editorial cautioned about a “double bubble” and told its readers, “A housing bubble may be developing – right behind the Nasdaq bubble.” Both indicated that such an event would be devastating to the economy.
What those reports failed to explain was that an investment bubble occurs when an asset appreciates by extraordinary percentages for a short period of time, culminating in a rapid decline that wipes away most of the gains. A perfect example is the NASDAQ stock index, which went from roughly 1,400 in October 1998 to more than 5,000 in March 2000 (a 250-percent gain in less than 18 months), only to fall back to about 1,400 by October 2001 (a 70-percent decline in about 18 months). The housing market is less liquid and prices don’t usually change quickly like stocks do.
Four of 16 media reports in 2001 that referenced a housing bubble were either written by or cited New York Times economic columnist Paul Krugman. Of particular note was a September 30 Times article by Krugman entitled “Fear Itself” where he wrote: “Housing was doing better, thanks to low interest rates, but some analysts were warning about a housing bubble – and even if they were wrong, how solid a recovery could we have from housing alone?”
Average housing prices ended 2001 up 6.3 percent, despite that prediction.
By 2002, housing bubble references in the mainstream media exploded to almost one a day and became much more commonplace outside of business publications. Federal Reserve chairman Alan Greenspan even was asked about this subject during his July 17 testimony before Congress. “We’ve looked at the bubble question, and we’ve concluded that it is most unlikely, mainly because, one, we have a very diverse real estate market throughout the country,” Greenspan said.
That didn’t quiet the media’s concerns. The Chicago Tribune and USA Today ended the year by warning their readers about the danger of a bubble. USA Today even warned of a possible recession:
- “All the fuss about whether we’re facing a housing ‘bubble’ might be compared to the argument over whether the world will end with a bang or with a whimper. Some economic clairvoyants are waiting for a ‘bang’ – for housing prices, like tech stocks, to plummet.” Chicago Tribune, Dec. 15, 2002.
- “That might be especially true now as real estate experts and economists warn of possible housing bubbles – and a possible crash – in the Bay Area and beyond. While home prices powered ahead for much of the past year, there are signs of weakening. Median U.S. prices peaked at $163,900 in June, but have fallen since. A big decline in a handful of key markets could help drive the USA back into recession.” USA Today, Dec. 16, 2002.
The number of reports about the housing bubble that involved or were written by Paul Krugman increased to 17 in 2002. His August 2 column even suggested that the Fed should, or was planning to, create a bubble. He said that to fight recession, the Fed “needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. Judging by Mr. Greenspan’s remarkably cheerful recent testimony, he still thinks he can pull that off.”
Average housing prices ended 2002 up 5.7 percent.
Such discussions became even more commonplace on TV in 2003. NBC’s “Today” began the new year on January 2 with Financial Editor Jean Chatzky stating: “A lot of people are looking at the housing market right now and saying, ‘Has it gone too far? Are we in a housing bubble?’”
This question dogged Greenspan in 2003. After he spoke at the Ronald Reagan Presidential Library on April 10, the Associated Press reported Greenspan as having said, “I personally don’t think there is a housing bubble similar to that that exists in stocks.”
Average housing prices ended 2003 up an amazing 8.5 percent, despite bubble fears.
By 2004, housing bubble discussions, as well as predictions of an imminent collapse in prices, were showing up throughout the media. As a result, any bad housing report became important news. Kitty Pilgrim of CNN interjected this during her December 23 stock market report on “Inside Politics”:
“But now there are new signs of weakness in real estate. New home sales fell 12 percent last month. And that was the biggest decline in nearly 11 years. The new home sales report is the second in a week, signaling a possible slow down. Last week housing starts posted the biggest decline in 11 years.”
What was Pilgrim’s conclusion? “Economists say that the drop in sales, weak construction numbers – that could be a warning sign of trouble ahead in the real estate market.” That November 2004 report ended up being an anomaly, and real estate sales continued strong in the months that followed, as did the economy.
ABC’s Mellody Hobson also went against Wall Street’s wisdom on the issue, saying she was “a little skeptical” on the December 22 “Good Morning America.”
“They say that Wall Street analysts who are surveyed are more bullish than they've been since January of 1987. Now we know what happened at the end of that year,” Hobson said. “But there’s some things that worry me. This deficit is out of control, the war has not been going so well. Oil remains a wild card. Interest rates, and rising interest rates specifically, could be the pin that bursts the housing bubble.”
Average housing prices ended 2004 up a whopping 9.3 percent – again defying predictions.
As Alan Greenspan approached a well-deserved retirement, a new Federal Reserve chairman was nominated in October 2005. He too questioned the existence of a housing bubble. As The Washington Post reported on October 27: “Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.” Instead, these increases “‘largely reflect strong economic fundamentals,’ such as strong growth in jobs, incomes and the number of new households.”
Still, the higher housing prices have gone, the gloomier the press accounts have become. The Associated Press reported on Nov. 11, 2005: “A downturn in housing could mean more than 1.3 million lost jobs, Goldman Sachs Group Inc. predicts, bumping up the national unemployment rate by 1 percent and the unemployment rate in house-mad California by 2 percent.” Even more disturbing in the article was this scary claim: “The Center for Economic and Policy Research predicts worse, saying a bubble burst would mean the loss of 5 million to 6.3 million jobs.”
Three days later, CBS’s Julie Chen reported on the “Early Show”: “Mortgage rates are at their highest in more than two years, and many home owners are worried that the real estate boom has finally gone bust.”
Almost on cue, the National Association of Realtors the following day released housing numbers for the third quarter of 2005, showing anything but a “bust”: “The national median existing single-family home price was $215,900 in the third quarter, up 14.7 percent from the third quarter of 2004 when the median price was $188,200.”
It’s been more than four years since the media began reporting bearish housing predictions in earnest. Yet real estate values have forged ahead. As a result, the net worth of the average citizen is now at an all-time high, well exceeding what Americans enjoyed during the stock bubble years of the late ’90s and early 2000s. In addition, and maybe most importantly, close to 70 percent of residential dwellings are now owned by one or more of the inhabitants, also an all-time high.
So who’s right about real estate – the media that have been predicting a crash for more than four years, or past and future Federal Reserve chairmen along with millions of Americans who have bought a piece of the American dream during this run-up?
So far, the answer is clear. However, given the seriousness of this issue, and just how much impact the housing market has on the rest of the economy, the media should learn from this and present even-keeled reports that deal with how people should invest their money.