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Kevin Erdmann was right

Summary:
Back in 2009-10, I did a number of posts criticizing the theory that rising house prices in the early 2000s represented a “bubble”.  In one post, I pointed to an article in The Economist that criticized Eugene Fama, and bragged that they had presciently foreseen the housing bubble.  In fact, the specific predictions they cited (from an 2003 advertisement for The Economist, since deleted) turned out to be almost entirely wrong, indeed wildly off base. The Economist did not take kindly to my post: Mr Sumner disagrees. He seems to think it’s funny that The Economists pent much of the last decade warning that, globally, home prices were rising in a troubling manner. Contrarianism is fun and all, but this strikes me as an odd way to process the experiences that led us

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Back in 2009-10, I did a number of posts criticizing the theory that rising house prices in the early 2000s represented a “bubble”.  In one post, I pointed to an article in The Economist that criticized Eugene Fama, and bragged that they had presciently foreseen the housing bubble.  In fact, the specific predictions they cited (from an 2003 advertisement for The Economist, since deleted) turned out to be almost entirely wrong, indeed wildly off base.

The Economist did not take kindly to my post:

Mr Sumner disagrees. He seems to think it’s funny that The Economists pent much of the last decade warning that, globally, home prices were rising in a troubling manner. Contrarianism is fun and all, but this strikes me as an odd way to process the experiences that led us to this point.

I responded:

 I would note that Free Exchange seemed to enjoy making fun of Fama’s views.

Now The Economist has seen the light:

Perhaps it is just a matter of time before the house of cards collapses. But as a recent paper by Gabriel Chodorow-Reich of Harvard University and colleagues explains, what might appear to be a housing bubble may in fact be the product of fundamental economic shifts. The paper shows that the monumental house-price increases in America in the early to mid-2000s were largely a consequence of factors such as urban revitalisation, growing preferences for city living and rising wage premia for educated workers in cities. By 2019 American real house prices had pretty much regained their pre-financial-crisis peak, further evidence that the mania of the mid-2000s was perhaps not quite so mad after all.

Fundamental forces may once again explain why house prices today are so high—and why they may endure. Three of them stand out: robust household balance-sheets; people’s greater willingness to spend more on their living arrangements; and the severity of supply constraints.

I’d add permanently low real interest rates.

I would like to take credit here, but I was just shooting from the hip when I questioned the housing bubble view that was so popular after 2006.  Credit should go to Kevin Erdmann, who produced a mountain of evidence against the bubble hypothesis in two very impressive books on housing.  His view, which was once highly contrarian, has now been completely vindicated.  Indeed, I don’t see how any fair-minded person reading his books could still believe in the housing bubble theory.  Unfortunately, he’ll probably be ignored.  The media tends to focus on academic research from top schools like Harvard, not unaccredited individuals working on their own.  Better to be famous than to be right.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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