![]() ![]() "The main thing we draw from that book is the idea that these boom-bust cycles start with some change in fundamentals," Chodorow-Reich says. The book provides a sweeping history of financial crises, from the currency crisis in the Holy Roman Empire, to "tulipmania" in Holland, to the dot-com bubble in the late 1990s. Kindleberger's most popular book was called Manias, Panics and Crashes. Kindleberger then started researching and teaching at the Massachusetts Institute of Technology, producing a flurry of influential books and papers. After the war, he was one of the brilliant minds behind the Marshall Plan, which helped rebuild Europe. ![]() During World War II, he worked for the Office of Strategic Services, the predecessor of the CIA. Kindleberger should probably have a Hollywood movie made about his life. The bubble theorist who led an amazing life "The fact that the largest long-run growth is in superstar cities, like San Francisco, Seattle, San Diego and Boston - places that have constrained supply, lots of growing industries and good jobs - suggests this was a fundamentals-driven cycle."īut if there was a real reason for prices to soar in these places, then why did these places see a bubble and crash? To explain this, Chodorow-Reich and his colleagues resurrect a theory of a long-dead economist, Charles Kindleberger. Chodorow-Reich, a Harvard University economist who co-authored the study, says these places were mostly the so-called superstar cities, which have seen roaring economic growth over the last few decades. Not only that, they find that these fundamentals explain which places had the biggest booms, the biggest busts and the biggest rebounds. The economists find these fundamentals explain most of the long-run price growth in those areas. And they look at how hard it was to increase the supply of new homes in those areas to accommodate rising demand. They look at factors such as job growth and amenities that increased housing demand in local markets around the nation. In this new study, the economists look backward, with 20/20 hindsight, and do lots of work to figure out what the fundamental value of homes really were. The other side believes that quirks of human psychology lead homebuyers and sellers to misjudge the fundamental value of homes, leading to bubbles and crashes. They believe housing bubbles are rare, or even impossible. One side believes that homebuyers and sellers are rational, effectively processing information about home fundamentals before they buy or sell. There's been a decades-long economic debate over if and why manias cause homes to depart from their fundamentals. Importantly, the fundamental value of a house is determined by the supply and demand for houses in a given area: If it's desirable to live in that area and there aren't enough homes for incoming residents, the fundamental value of each house will rise. A house's fundamental value includes things such as its proximity to good-paying jobs whether it's in a locale with a nice climate or fun things to do whether the school district is good whether it has desirable characteristics, such as good square footage and an architectural style that's in vogue. ![]() Fundamentals are what an asset is actually worth. Bubbles 101Įconomists define bubbles as when the prices of assets - such as stocks and houses - depart from their fundamentals. But they also find evidence that may provide some comfort to homeowners: Something real can explain the long-run upward trend in home prices. They find evidence that the price surge in the 2000s was indeed a bubble, which serves as a scary reminder that the housing market can go wild and crash. It has the perfect title: "The 2000s Housing Cycle With 2020 Hindsight." McQuade helps to explain the dynamics of our bonkers housing market. Are we in another bubble? Or maybe the housing bubble a couple decades ago wasn't really a bubble? If so, then why was there a crash?Ī new study by economists Gabriel Chodorow-Reich, Adam M. Now that home prices have surpassed the peak that preceded the 2000s housing crash, many people are worried. The average price of American homes, in real terms, is now the highest it's ever been - even higher than the peak of the housing bubble in 2006 before it crashed 60% and bottomed out in 2012. Then came the pandemic, marked by a buying frenzy and a selling freeze, which created a supply-demand mismatch that made the price boom go into warp speed. It was the third biggest housing boom in American history. housing market into overdrive, the price of the average American home was on a rocket ride, climbing more than 50% between 20. ![]()
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