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The U.S. Housing Bubble Wasn't Special
Jesse Richman, 9/3/2012

The Economist has a nice app that allows you to compare nominal and real home prices across a substantial number of countries and over time.  This data is worth thinking about because it helps point out the basic limits of certain stories some try to sell about the housing boom and bust.

In the figure I used this app to display real housing price trends for a number of different countries from 1998 to today.  All of the countries I selected had larger increases in real home prices than the United States did.  All saw prices increase substantially by 2005 or so, and nearly all have seen substantial declines in housing prices since that point.  The United States is the light green line that is lower than all of the other countries as of 2012.


Some narratives about the housing price bubble in the United States that are adopted by the political right (community reinvestment act) and the political left (corrupt bankers left unregulated) fail a basic and simple test that this figure highlights.  Both are explanations that are United States centric.  They focus on policy changes enacted in the U.S. and seek to explain housing price changes in the U.S. 

The fact that many other countries experienced similar housing booms (some haven't fully gone bust yet either) at roughly the same time cries out for explanation.  If the U.S. regulatory environment caused the housing boom and bust, why did the same boom and bust happen in a lot of other places at about the same time.  How could the Community Reinvestment Act have caused the price bubble in Spain, to put the matter more bluntly.  While it is possible that the same regulatory changes happened in many countries at the same time, a more likely conclusion is that it was something else. 

In particular, I'd point to the increasing flows of money driven by  governments accelerating mercantilist policies.  The developed countries that have substantial trade surpluses (Germany and Japan, for instance) did not experience the housing bubble. 

Another factor may be the spread of a set of financing techniques for housing that turned out to be subject to a large information asymmetry driven market failure.  In the United States and in other countries as well, there was a shift toward securitization of mortgages which were repackaged and resold in a dizzy array of different flavors to investors.  The problem with this practice is that it generates powerful temptations for those acting as middle men to ignore fundamentals like ability to pay.  If your business is repackaging mortgages, then you can gain added income through (helping people tell) lies about credit worthiness.  This substantial market failure driven by information asymmetry subsequently demonstrated that this financing model had deep flaws. 

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Comment by Jeff Paetkau, 10/8/2012:

Socialist-minded leaders, unfortunately including our own Progressives, spread most misery.  Ignoring and/or denying the consequences of "progressive" policy is a serious mistake.

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