Arnold Kling

Housing Bubble?

Arnold Kling, Great Questions of Economics
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In the Washington Post, Robert Samuelson points out that housing has performed well as an asset recently.

From year-end 1999 until last September, household stock wealth -- mutual funds and directly owned shares -- lost about $4.4 trillion in value, dropping to $8 trillion. Almost half the loss was offset by higher home values, up $2 trillion to nearly $12 trillion over the same period.

...But inconvenient questions arise. Is housing's bull market genuine? Or is it another "bubble"?

For housing, you can calculate a price-earnings ratio based on the price of a house compared to the cost of renting that house. In 1996, when I was with, I argued that this price-earnings ratio was low, particularly compared to the stock market. However, home prices failed to appreciate significantly at that time. My guess is that the price-earnings ratio for housing remains low, despite what has taken place in the past two years.

Discussion Question. What demographic and financial factors have contributed to an increase in the demand for housing services?

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