Housing Bubble? Housing Market Readings

Here are the readings covering the housing market leading up to the bursting of the bubble. Please have these read for class on Wednesday January 20th. I have provided direct links to the readings on the sidebar. For details on the readings, read on.

Some readings from the popular press:

• Business Week, July 19, 2004: "Is a Bubble About to Burst?"
• Jim Jubak, Columnist at MSN Money, June 10, 2005; "Why there is no housing bubble"
• Article about Ben Bernanke in Washington Post, Oct. 27, 2005; "Bernanke: There's no Housing Bubble to go Bust"

In reading these, ask yourself what were the main issues the popular press was pointing to to determine whether there was a bubble in the housing market.

Next some readings from economic researchers. Note that a lot of researchers discounted the likelihood that there was a housing bubble. Therefore, the papers and researchers listed here should not be singled out as having made a terrible prediction. Rather their work here represents what a lot of very smart people were thinking and saying at the time. The papers should be read as a way to understand the relevant issues and to better understand how people were thinking. Further, note how most researchers made conditional predictions for the economy in the case where there was a bubble--most of these conditional predictions came to fruition!

First, two short articles from John Krainer, an economist at the Federal Reserve bank of San Francisco. Note that both of these articles were written early in the housing bubble, before 2004.

• Economic Letter, May 3, 2002: "House Price Dynamics and the Business Cycle"
• Economic Letter, March 7, 2003: "House Price Bubbles"

What does Krainer argue about the likelihood of a fall in Nominal house prices?

Next two papers with differing views about whether there was a housing bubble. First a paper by Jonathan McCarthy and Richard W. Peach, two economists at the Federal Reserve Bank of New York. They found that house prices were justified by the fundamentals.

• FRBNY Economic Policy Review, December 2004 "Are Home Prices the Next `Bubble'?"
  

The NY Fed economists were just part of a large crowd who justified high house prices with fundamentals, for instance see "Assesing High House Prices: Bubbles, Fundamentals and Misperceptions" by Himmelberg, Mayer and Sinai.

The next paper is by Karl Case and Robert Shiller. In this paper they examine whether there is a bubble. The innovation in their work is a survey about buyer's expectations--concentrate your reading on this part of the paper.

• Brookings; "Is There a Bubble in the Housing Market" (this version of the paper comes from JSTOR, requiring you to be over an IU connection. An earlier unrestricted version can be found at Karl Case's webpage here)