Bubbles? What Bubbles?
MY NOTE: This is the mainstream view from two Freddie Mac economists:
freddiemac.com
Bubbles? What Bubbles?
Special Commentary from the Office of the Chief Economist
by Amy Crews Cutts, Freddie Mac's deputy chief economist, and Frank E. Nothaft, Freddie Mac's chief economist
May 6, 2004
The strong run up in home prices over the last several years has many wondering whether the housing market may be a bubble waiting to burst. Many definitions of asset-price bubbles exist. Shiller (2000) describes a bubble as when an asset’s price is driven by speculation – the belief that prices can only go up without any supporting market fundamentals. Based on this, we believe that at the national level a house-price bubble does not exist, and, in nearly all metropolitan areas, rising home values are firmly rooted in economic fundamentals. Among them are: supply of housing, transactions costs, interest rates and user costs, rent versus price growth, and household incomes.
Inventories of homes-for-sale are near their lowest levels ever [Exhibit 1], and the supply elasticity in housing is highly inelastic due to zoning and environmental constraints; these are most binding in the fast growing coastal states. Additionally, the majority of new homes today are built by national builders who secure options on raw land rather than purchase it, obtain permits in advance, and move operations to growing areas opportunistically. This inventory management was not possible when builders were all locally based.
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