Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 8-Sep-2009
The housing bubble began in 1995.

Web Log - September, 2009

The housing bubble began in 1995.

This means that the housing crisis will last for almost another decade.

Pundits, politicians, journalists and Nobel prize winners have all been looking at various political explanations of the housing bubble. For years, they said the bubble didn't exist at all, but late in 2007 when it clearly was leaking, they blamed it on Alan Greenspan or George Bush, using some tortured logic.

Almost none of the mainstream analysts and economists even admitted that there was a real estate bubble until 2006 or so, when Nouriel Roubini discovered the bubble and announced it to the world. By that time, it was already pretty clear that it had begun to leak.

I started writing about the real estate bubble in 2004, but I too thought at that time that it was caused by the low near-zero interest rates that Alan Greenspan and the Fed had put into effect. I later rejected that view, as I came to understand that the bubble occurred in countries around the world.

I've just become aware of a 2002 research report by Dean Baker of the Washington-based Center for Economic Policy and Research. This paper shows clearly that the real estate bubble began in 1995, the same time as the dot-com bubble.

Baker shows this in several ways, but the following graph shows it most clearly:

Cost of owning real estate versus renting, 1975-2002 <font size=-2>(Source: Dean Baker)</font>
Cost of owning real estate versus renting, 1975-2002 (Source: Dean Baker)

This graph compares real estate prices with rental prices. As you can see, the two graphs began diverging significantly in 1995, with cost of ownership surging.

This REALLY makes a lot of sense, because it corresponds exactly to the start of the dot-com bubble. Furthermore, although the real estate bubble didn't START in 2003, it really skyrocketed starting in 2003, and that also corresponds to the huge credit bubble.

Let's take another look at this chart, that I first posted in 2007:

Generational 'moods' overlaying Dow Industrials since 1950
Generational 'moods' overlaying Dow Industrials since 1950

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I described this chart in detail in the above-mentioned article, but here I only wish to relate this chart to this new information about the real estate bubble.

The point of inflection that occurred in 1995, the time when all the Great Depression survivors disappeared (retired or died), and Boomers rose to senior management positions. At this time, the cautious investment strategies of the risk-averse Depression survivors were replaced by the reckless investment strategies of the Boomers. We now know that the real estate bubble began at the same time of generational change.

Then, in 2003, the credit bubble exploded, and so did the real estate bubble.

This really ties things together from the point of view of Generational Dynamics. It's always bothered me a little that the real estate bubble apparently began in 2003, but now with the real estate bubble starting in 1995, along with the dot-com bubble, everything fits together.

Now, there's a little more to this story.

I found my way to the 2002 paper on the housing bubble through a blog entry by its author, Dean Baker. Baker was commenting on a NY Times article that congratulated President Obama, Timothy Geithner, Lawrence Summers, Ben Bernanke and Henry Paulson because "the financial crisis of 2008 turned out to be far less bad than it could have been."

Here are some excerpts:

"What If the Captain of the Titanic Managed to Get Three Quarters of the Passengers on Life Boats?

David Leonhardt wants to congratulate the gang that led us into the worse economic downturn in more than 70 years because it will not be as bad as the Great Depression. Yes, the downturn could be worse, but let's be serious.

This crash was 100 percent preventable to anyone watching the economy and capable of doing 3rd grade arithmetic. The housing bubble was easy to see and it should have been obvious that its collapse would devastate the economy. ...

This is a complete disaster. Any custodian, dishwasher or shoe salesperson who showed the same degree of incompetence on their job would be fired instantly. There is no reason that the country should engage in this soft bigotry of low expectations when it comes to economic policy. This crew blew it just about as badly as anyone conceivably could. Saying that you didn't give us another great depression is not exactly a winning re-election slogan."

This is what drives me crazy. Here's a guy from a Washington DC economic think tank. He's done the research. He's established that the real estate bubble is correlated to the technology bubble. He offers no opinion at all as to what happened in 1995 to cause both bubbles to start growing; indeed, he has no idea why the bubbles occurred at all, and why they began in 1995, as opposed to 1985 or 2005. He doesn't even pretend to have the answers to these questions.

And yet, even though he has no idea about how the bubble started, he's ABSOLUTELY CERTAIN he knows all the answers about how to keep the bubble from crashing. He says, "This crash was 100 percent preventable to anyone watching the economy and capable of doing 3rd grade arithmetic. The housing bubble was easy to see and it should have been obvious that its collapse would devastate the economy."

Well how the hell was the crash preventable? Perhaps he thinks that Congress could have passed a law making it illegal for bubbles to crash. What more could President Obama, Timothy Geithner, Lawrence Summers, Ben Bernanke and Henry Paulson have done beyond what they did do -- flood the economy with trillions of dollars worth of bailouts, stimulus and quantitative easing?

In fact, now that we know that the housing bubble began in 1995, we can draw some further conclusions: Since the bubble started leaking in 2006, it lasted for 11 years, and so we can apply the Law of Mean Reversion and, assuming that it leaks at roughly the same rate that it grew in the first place, the housing crisis will last 11 years, until 2017.

The credit and real estate bubbles were hundreds of trillions of dollars in size, and growing. To say that the crash was preventable is typical of the nonsense produced by economists today.

Speaking of economists who produce lots of nonsense, Nobel prize winning economist Paul Krugman has just written a lengthy article titled, "How Did Economists Get It So Wrong?" Krugman won the Nobel Prize because he met the prize committee's major criterion: Hatred of George Bush. In his columns, he's pretty much given up any pretense of economics, since each conclusion he reaches is based on ideological considerations. One of the major reasons that economists got it so wrong is that they interpret everything through an ideological filter. Krugman's new article might be called an ideological history of economics of the 20th century. Pathetic.

At any rate, now that we know that the housing bubble began in 1995, we know that it couldn't have been caused by George Bush or Ben Bernanke. It also wasn't caused by Alan Greenspan's near-zero interest rate policy, since that began in 2002. Ideologues on the right might try to blame it on President Bill Clinton, but that's silly as well. The real estate and dot-com technology bubbles were caused by the disappearance of the risk-averse Great Depression survivors from senior management positions in the early 1990s, and the dumb investments made by Boomers when they reached those senior management positions.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (8-Sep-2009) Permanent Link
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