The next housing bubble

       The burst housing bubble of 2008 -- traumatic marker of the end of the Bush presidency, trigger of the Great Recession -- won't soon be forgotten. Some have called for the so-called mortgage cram-down bill to help the millions of homeowners underwater and threatened by foreclosure. Just today, President Obama called for changes to make it easier to refinance federally backed loans.  Fixing the housing market is viewed as a gateway to recovery; still others maintain housing and homeownership shouldn't remain at the center of the economy, while rentals are much in demand.
       Throughout all this dialogue, an important empirical question remains: is it possible to see bubbles growing to the breaking point -- and by implication, do something about it? James R. Follain and Seth H. Giertz, co-authors of A Look at US House Price Bubbles from 1980-2010 and the Role of Local Market Conditions, a Lincoln Institute working paper, investigated the relationship between housing prices and several explanatory variables for a large panel of U.S. Metropolitan Statistical Areas, to gain insight into the likelihood that price bubbles are present. They will present on their findings in the second installment of the Lincoln Institute's fall lecture series, Boom and Bust: A Look at Housing Bubbles 1980-2010, November 2 at noon at Lincoln House.
      By using the Monte Carlo method, the authors were able to project house price (and employment) distributions for each MSA, allowing a test of the role of local market conditions in the formation of price bubbles. The variation in projected house price appreciation appears to be driven by differences in local market conditions, which include growth rates in real house prices, employment, real income per capita, and a variety of fixed effects. Their analysis underscores the complexity of forecasting bubbles -- and the difficulties of doing so in a framework based on the notion of a national housing market. As any real estate agent might say, housing markets are pretty local.
     James R. Follain, a senior fellow at the Nelson A. Rockefeller Institute for Local Government, is an economist with extensive academic and other professional experience in the empirical analysis of housing and mortgage markets and public policies that affect them. Seth H. Giertz is an assistant professor of economics at the University of Nebraska-Lincoln, and served at the Congressional Budget Office’s tax division, and the President's Advisory Panel on Federal Tax Reform.