The Wharton School by Wikimedia commons
When Fernando Ferreira and Joseph Gyourko, professors of The Wharton School, University of Pennsylvania, published Anatomy of the Beginnings of the Housing Boom: U.S. Neighbourhoods and Metropolitan Areas, 1993-2009, they joined a long line of specialists analyzing the housing boom. However, they generated important findings that aren’t in perfect accordance with current assumptions and they brought new questions about housing boom causes into the discussion.
Why is Analyzing the Housing Boom so Important?
Studying the housing boom is crucial for the same reason why we’re interested in history. Only if we know why it started will we be able to learn from previous mistakes, to predict them, and to avoid the consequences that were so disastrous. It’s important to establish a timeline of the housing boom because if we want to understand why it started, we have to determine its beginning.
Despite this work and the fact that we are now several years into the current housing crisis, researchers and policy makers still have conflicting views and limited knowledge about the causes of that extraordinary rise and decline in house prices.
Analyse by Eirik Stavelin
The conflict is exaggerated because of the great diversity of opinion on the subject. There are hundreds of analyses, books, documentaries, and newspaper articles that cover the topic. The general theory is that the boom was based on policy measures including the following:
- Attractive tax policy, especially after the Tax Reform Act of 1986 that eliminated tax deduction for interest paid on credit cards
- The introduction of extremely low interest rates by FED as a consequence of the dot-com bubble
- A general belief that housing is a good investment that is still unshakeable
- The Bush Administration’s ‘American Dream’ policy that tried to spread home ownership to lower income groups through zero equity lending, which greatly facilitated the generation of the mortgage raw materials
Differences Overshadowed by National Data
The […]plot of the two most prominent aggregate house price indexes [Case-Shiller and FHFA] provides a misleading sense that the recent boom was a single national event which began in the early to middle part of the last decade.
The analysis showed that there are significant regional differences that were masked by national data. Of course, most analysts didn’t suppose the boom happened in the same time all over the country — they just didn’t consider deviations important enough to include them in their research. Gyourko and Ferreira pointed out that if we want to explore the boom deeply, we should be aware of such differences. It is an important point for future analyses.
Differences in Growth of Prices and Income
When we look at various potential causes of the boom, only income increases materially at the same time that the rate of price appreciation initially jumps. […]However, there is important heterogeneity in this effect, and a back-of-the-envelope calculation suggests that this fundamental can account for the majority of the magnitude in price jumps in early booming and in inelastically supplied markets, but for little or none of the jump in late booming and elastically supplied markets.
Housing by Woodleywonderworks
Elastically supplied markets experienced the boom later than inelastically supplied markets. However, income jumps of late-booming markets were low or none at the beginning of their housing booms, while price growth in these areas was significant. The opposite situation occurred in early-booming countries. This causes new difficulties when we want to identify a housing boom because even though there isn’t a sharp growth of prices (income), a country can already face a housing bubble.
Just a Question of Time?
Our neighbourhood analysis – based on groups of two or three contiguous census tracts – also shows similar heterogeneity in timing, with booms beginning as early as 1996 and as late as 2006.
Many theories of the housing boom are based on the assumption that it started in the last decade — they only differ in the year of its beginning. Others are consistent with the findings of Gyourko and Ferreira. But if they’re true, they have substantial impact on currently discussed causes of the boom.
This means that the Bush Administration as well as the consequences of the dot-com bubble weren’t the main reasons — at least not in all areas. Undoubtedly, they supported housing activity, and the boom strengthened as a result, but what would happen if there weren’t Bush’s ‘American Dream’ or low interest rates? If the boom started in some areas in 1996-1997, was there any possibility to avoid its collapse, or was it only a question of time? We should explore more deeply in the past to find the first and probably main incentive, and we should consider measures adopted in the beginning of the 2000s, additional stimuli that helped the boom to gain strength.