Dean Baker responded to my comment:>Both the home price index that I
cite in the paper and the CPI's rental index are quality adjusted (more
or less) so there would not be an issue of composition effects driving
the price changes. It could be the case that more income at the upper
end leads to more increase in the price of upper end housing, but this
really couldn't explain the bubble for two reasons. First, home
ownership strecthes well down the incoem ladder, with 68 percent of
households as homeowners. Second, the bubble years 1995-2002, where
exactly the years in which income inequality fell back somehwat. The
rise in inequality could have explained limited bubbles earlier in the
Reagan-Bush years, but not at the end of the period (which just happens
to coincide with the stock bubble). <
I think that Dean's comments on my speculation are right. However, it's
still true as I suggested, that the Bush tax plan might have the effect
of counteracting the deflation of the housing bubble (while making the
distributional situation even worse).
Jim
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I had written:
While reading Dean Baker's excellent article on the housing bubble in
the current issue of CHALLENGE, I thought of a factor that he didn't
discuss, i.e., the distribution of income and wealth. This might suggest
that the "bubble" isn't that much of a bubble (it should be clear from
the outset that I am not a specialist on the economics of housing).
Dean's main evidence concerns the way in which the price of buying a
house (the asset price) has soared in recent years compared to the
rental price of housing. This is like the price/earnings ratio for
stocks (equities). When the stock price/earnings ratio gets too high
relative to the historical average (as in 2000), it is quite likely to
fall (as in 2001-2). The price/earnings ratio for housing has been
rising and quite high in recent years, with little moderation recently,
suggesting that the asset price of housing will fall in the future (as
the housing bubble deflates or pops). It's seen as a "bubble" because a
lot of the high price/earnings ratio is due to optimistic expectations
(that housing prices will continue to rise) rather than on "fundamentals."
Okay, my thought, about one "fundamental" which could be behind the
bubblish data: one of the things that also happened is the widening gaps
in the income and wealth distributions that has been sustained over the
last 25 to 30 years (with a temporary narrowing of the income gap during
the late 1990s). The people on the low end of the income and wealth
distributions are more likely to be renters, while those on the top are
more likely to be buyers, of housing. Because the supply of housing does
not shift between rental units and to-be-purchased units very quickly,
the resulting shift in the distribution of demand would lead to
increasing gap between the rental and purchase price of housing.
In this view, it's also quite possible that there's a bubble going on.
But it does suggest that the situation is not as dire (in terms of
bubble economics) as sometimes thought. It also suggests that the Bush
program of cutting taxes for the rich (and, now, raising them for the
poor) would have the effect of keeping the bubble from deflating, or at
least from not popping. That it would also intensify injustice is also
clear.
any thoughts?
Jim Devine jdevine@xxxxxxx & http://bellarmine.lmu.edu/~jdevine