HOUSING BUBBLES, HERDS AND FRENZIES: EVIDENCE FROM
BRITISH HOUSING MARKETS
http://www.landecon.cam.ac.uk/research/reu.../pdf/pb0205.pdf
Full Version: An Eye-opener For Newbies!
Nice find Alabala, I'll give that a read later!
BOOMS AND BUSTS: CONSUMPTION, HOUSE PRICES AND EXPECTATIONS
http://www.ifs.org.uk/wps/wp0524.pdf
Being newbie in economics is like being newbie in Consumer Psychology, I wasn't bearish type, but now I am;why?,
because of this figure 1,300,000,000,000...it scares me shitless!
http://www.ifs.org.uk/wps/wp0524.pdf
Being newbie in economics is like being newbie in Consumer Psychology, I wasn't bearish type, but now I am;why?,
because of this figure 1,300,000,000,000...it scares me shitless!
http://www.federalreserve.gov/pubs/ifdp/2005/841/ifdp841.pdf
House Prices and Monetary Policy: A Cross-Country Study
House Prices and Monetary Policy: A Cross-Country Study
QUOTE(alabala @ Jun 25 2007, 10:27 PM) 
I wasn't bearish type, but now I am;why?,
because of this figure 1,300,000,000,000...it scares me shitless!
because of this figure 1,300,000,000,000...it scares me shitless!
Don't forget to add other types of debt:
Public (government) debt = £500bn ish
Future public infrastructure liabilities = £250bn (PFI, Network Rail)
Future unfunded liabilities = £700bn ish (public Pensions)
Private Company Debt ????
Kinda scary!
ARE HOUSE PRICES NEARING A PEAK? A PROBIT ANALYSIS FOR 17 OECD COUNTRIES
http://www.olis.oecd.org/olis/2006doc.nsf/.../JT03209987.PDF
http://www.olis.oecd.org/olis/2006doc.nsf/.../JT03209987.PDF
QUOTE(alabala @ Jul 18 2007, 11:57 AM)
ARE HOUSE PRICES NEARING A PEAK? A PROBIT ANALYSIS FOR 17 OECD COUNTRIES
http://www.olis.oecd.org/olis/2006doc.nsf/.../JT03209987.PDF
http://www.olis.oecd.org/olis/2006doc.nsf/.../JT03209987.PDF
this paper suggests that the UK has a good chance of a 'soft landing' for house prices. fwiw I can't see this happening in btl which is a new phenomenon, but for non-btl influenced areas, and also the rife demand in the SE, soft landing seems plausible.
Maybe it does, as you said BTL are investors and they can afford to lose money as FTB, withdrawal from the market will end with considerable financial loses, again the paper mention the effect on the economy when adjustments happen plus IR adjustment. Looking at this and the money that people have taken against their Houses/ Mortgages means that much more people will be affected, and seriously the previous Crash or adjustment will be considered as a negligible compared to what is coming. Maybe they are right saying this one is different, with such scary amount of borrowing, definitely this one will be different.
However, the extent to which real house prices look to be fairly valued depends critically on interest rates remaining at or close to their current historical lows. If interest rates were to rise significantly,house prices would come under downward pressure as the user cost would fall out of sync with the prevailing price-to-rent ratios or because affordability constraints kick in. Real house prices would have to adjust downwards, but with inflation lower than in previous episodes, a bigger share of the burden of the adjustment will need to be borne by nominal house price decreases. However, nominal house prices tend to exhibit downward stickiness: when overall conditions weaken, owners of existing homes tend to withdraw from the market rather than suffer a capital loss, while builders will develop fewer new properties. As a result, in a low inflation environment the adjustment of real prices will be drawn-out.
7. There are several main channels through which falls in real house prices affect activity:
• Wealth effects on private consumption. These occur either via saving responses to households perceived wealth or via collateral effects on household borrowing (Catte et al., 2004). In a number of countries (Australia, Canada, the Netherlands, the United Kingdom and the United States) this effect is significant, in part because these countries have been frontrunners in providing easy access to mortgage products that facilitate house equity withdrawals.
• Effects on private residential investment. Changes in the profitability of housing investment affect the construction sector as well as employment and demand in property-related sectors. A number of other factors may cushion the profitability effect. Specifically, supply constraints in the form of planning restrictions, the availability of land or the competitive conditions in the construction sector may act to smooth the production cycle by holding down housing investment in the upswing.
• Effects on the banking sector. Banks may be reluctant to make adequate provision for their loan losses when housing markets are buoyant, and supervisors may be reluctant to suggest it without solid evidence (Dobson and Hufbauer, 2001). Hence, when a large shock occurs, banks may find themselves with inadequate cushions to absorb the loss, which could affect credit availability. This could in turn adversely affect macroeconomic performance overall.
However, the extent to which real house prices look to be fairly valued depends critically on interest rates remaining at or close to their current historical lows. If interest rates were to rise significantly,house prices would come under downward pressure as the user cost would fall out of sync with the prevailing price-to-rent ratios or because affordability constraints kick in. Real house prices would have to adjust downwards, but with inflation lower than in previous episodes, a bigger share of the burden of the adjustment will need to be borne by nominal house price decreases. However, nominal house prices tend to exhibit downward stickiness: when overall conditions weaken, owners of existing homes tend to withdraw from the market rather than suffer a capital loss, while builders will develop fewer new properties. As a result, in a low inflation environment the adjustment of real prices will be drawn-out.
7. There are several main channels through which falls in real house prices affect activity:
• Wealth effects on private consumption. These occur either via saving responses to households perceived wealth or via collateral effects on household borrowing (Catte et al., 2004). In a number of countries (Australia, Canada, the Netherlands, the United Kingdom and the United States) this effect is significant, in part because these countries have been frontrunners in providing easy access to mortgage products that facilitate house equity withdrawals.
• Effects on private residential investment. Changes in the profitability of housing investment affect the construction sector as well as employment and demand in property-related sectors. A number of other factors may cushion the profitability effect. Specifically, supply constraints in the form of planning restrictions, the availability of land or the competitive conditions in the construction sector may act to smooth the production cycle by holding down housing investment in the upswing.
• Effects on the banking sector. Banks may be reluctant to make adequate provision for their loan losses when housing markets are buoyant, and supervisors may be reluctant to suggest it without solid evidence (Dobson and Hufbauer, 2001). Hence, when a large shock occurs, banks may find themselves with inadequate cushions to absorb the loss, which could affect credit availability. This could in turn adversely affect macroeconomic performance overall.
The US scenario: Can you talk down the prices?
http://www.cepr.net/index.php?option=com_c...3&Itemid=45
"The best and simplest way to burst a bubble is talk… Every real estate pusher in the country would have to deal with buyers armed with this information. Whether talk would be sufficient to burst a financial bubble is an open question—it has never been tried—but since talk is cheap, there seems little reason not to use the power of information as the first weapon against a bubble.”
2006 - 09
http://transcripts.cnn.com/TRANSCRIPTS/0609/30/oh.01.html
SHILLER: “The people who bought in at the top and sell out at the bottom can get really hurt. And so there will be bankruptcies, foreclosures, and people out of jobs, but we'll recover from it. And this is not nuclear war.”
BAKER: “Well, I don't see the prospects getting any better. And the downturn in mortgage rates that Frank mentions is an important point. I wouldn't bet on it staying there. So, in that sense, you know, people can get a lower -- buyers can get a lower mortgage rate today than they are likely to be able to get six months from now.So I would say the prospects don't look good today, but they are likely to look much worse six months or a year down the road. “
2005 - 07 - The Housing Bubble Fact Sheet
http://www.cepr.net/documents/publications...act_2005_07.pdf
2005 - 11 - Will a Bursting Bubble Trouble Bernanke?The Evidence for a Housing Bubble
http://www.cepr.net/documents/publications...ble_2005_11.pdf
2005 -12 - Is There a Housing Bubble?
http://www.cepr.net/index.php?option=com_c...view&id=343
2006 -06 - Is the Housing Bubble Collapsing? 10 Economic Indicators to Watch
http://www.cepr.net/documents/housing_indicators_2006_06.pdf
2007 Housing Bubble Update: 10 Economic Indicators to Watch
http://www.cepr.net/documents/publications...ors_2007_02.pdf
Recession Looms for the U.S. Economy in 2007
http://www.cepr.net/documents/publications...ast_2006_11.pdf
Mortgage Liquidity du Jour: Underestimated No More
http://www.billcara.com/CS%20Mar%2012%2020...d%20Housing.pdf
http://www.cepr.net/index.php?option=com_c...3&Itemid=45
"The best and simplest way to burst a bubble is talk… Every real estate pusher in the country would have to deal with buyers armed with this information. Whether talk would be sufficient to burst a financial bubble is an open question—it has never been tried—but since talk is cheap, there seems little reason not to use the power of information as the first weapon against a bubble.”
2006 - 09
http://transcripts.cnn.com/TRANSCRIPTS/0609/30/oh.01.html
SHILLER: “The people who bought in at the top and sell out at the bottom can get really hurt. And so there will be bankruptcies, foreclosures, and people out of jobs, but we'll recover from it. And this is not nuclear war.”
BAKER: “Well, I don't see the prospects getting any better. And the downturn in mortgage rates that Frank mentions is an important point. I wouldn't bet on it staying there. So, in that sense, you know, people can get a lower -- buyers can get a lower mortgage rate today than they are likely to be able to get six months from now.So I would say the prospects don't look good today, but they are likely to look much worse six months or a year down the road. “
2005 - 07 - The Housing Bubble Fact Sheet
http://www.cepr.net/documents/publications...act_2005_07.pdf
2005 - 11 - Will a Bursting Bubble Trouble Bernanke?The Evidence for a Housing Bubble
http://www.cepr.net/documents/publications...ble_2005_11.pdf
2005 -12 - Is There a Housing Bubble?
http://www.cepr.net/index.php?option=com_c...view&id=343
2006 -06 - Is the Housing Bubble Collapsing? 10 Economic Indicators to Watch
http://www.cepr.net/documents/housing_indicators_2006_06.pdf
2007 Housing Bubble Update: 10 Economic Indicators to Watch
http://www.cepr.net/documents/publications...ors_2007_02.pdf
Recession Looms for the U.S. Economy in 2007
http://www.cepr.net/documents/publications...ast_2006_11.pdf
Mortgage Liquidity du Jour: Underestimated No More
http://www.billcara.com/CS%20Mar%2012%2020...d%20Housing.pdf
Informational Cascades & Herding
http://www.cato.org/pubs/regulation/regv26n4/v26n4-2.pdf
http://www.nytimes.com/books/00/03/05/revi...5.05wolfet.html
http://www.esri.ie/UserFiles/publications/...um_SA_Kelly.pdf
http://wwwdocs.fce.unsw.edu.au/banking/sem...lj_mcaleer2.pdf
http://www.infosci.cornell.edu/courses/inf...nfo-cascade.pdf
http://else.econ.ucl.ac.uk/newweb/research/blurb1.php
http://else.econ.ucl.ac.uk/papers/uploaded/206.pdf
http://www.bepress.com/ev/vol3/iss4/art4/
http://www.cato.org/pubs/regulation/regv26n4/v26n4-2.pdf
http://www.nytimes.com/books/00/03/05/revi...5.05wolfet.html
http://www.esri.ie/UserFiles/publications/...um_SA_Kelly.pdf
http://wwwdocs.fce.unsw.edu.au/banking/sem...lj_mcaleer2.pdf
http://www.infosci.cornell.edu/courses/inf...nfo-cascade.pdf
http://else.econ.ucl.ac.uk/newweb/research/blurb1.php
http://else.econ.ucl.ac.uk/papers/uploaded/206.pdf
http://www.bepress.com/ev/vol3/iss4/art4/
The Impact of Recent Immigration on the London Economy (July 2007) Chapter 4 Accommodating the migrant population – the impact on housing markets
http://213.86.34.248/NR/rdonlyres/805656A4...igration_FR.pdf
http://213.86.34.248/NR/rdonlyres/805656A4...igration_FR.pdf
Further evidence on real estate market efficiency - Are housing price cycles driven by irrational expectations?
http://findarticles.com/p/articles/mi_qa37...i_n8774634/pg_1
http://findarticles.com/p/articles/mi_qa37...i_n8774634/pg_1
From the above and this last Doc on Herding & so, I can only asume that this is not some f***ing Joke!
Many people have simply been too "irrationaly exuberant"!
"More generally house prices rise because of increases not only in the numbers of households but also because of rising incomes and expectations about future house price rises, as well as alternative investment opportunities.""The impact on demand for housing in London is therefore much less than might at first be assumed" (irrational expectations)
---------------------------------------
= overoptimistic expectations leading to high pricing multiples = Incorrect Information in uncertain environment with asymmetric information agents
= "During collective actions, what is important is the interpretation of the information, not the information in itself"
= experts have a bigger propensity to be overoptimistic
= the new generation does not know about the preceding crashes and tends to underestimate or ignore the lessons of the past
= irrational exuberance
http://cas.umkc.edu/econ/Oeconomicus/Volum...02/Tymoigne.pdf
Many people have simply been too "irrationaly exuberant"!
"More generally house prices rise because of increases not only in the numbers of households but also because of rising incomes and expectations about future house price rises, as well as alternative investment opportunities.""The impact on demand for housing in London is therefore much less than might at first be assumed" (irrational expectations)
---------------------------------------
= overoptimistic expectations leading to high pricing multiples = Incorrect Information in uncertain environment with asymmetric information agents
= "During collective actions, what is important is the interpretation of the information, not the information in itself"
= experts have a bigger propensity to be overoptimistic
= the new generation does not know about the preceding crashes and tends to underestimate or ignore the lessons of the past
= irrational exuberance
http://cas.umkc.edu/econ/Oeconomicus/Volum...02/Tymoigne.pdf
QUOTE
An unstable financial situation requires a Ponzi process. The latter can only start
if the first investors who came into the market can convince new investors to come into it
to buy the titles owned by the first investors. For some authors, this process appears
because of herding, whereas for others it results from mimetic behavior (herding being
only a very special case). In the second case, the Ponzi process can appear only if the
main opinion is very optimistic or pessimistic; it is not sufficient that few investors sell.
A financial convention is established to justify high increases in asset-price and to
persuade new investors to come into the market. When this process is started, it will
necessarily finish in a brutal way because it is impossible for the economy to provide
more and more funds to sustain the Ponzi process. This second approach (the mimetic
approach) is very fruitful because it combines several explanations and takes account of
the social context in which investors evolve. It is, however, difficult to understand how
uncertainty and institutional and psychological factors are combined to explain the
market price. The following gives a coherent explanation of the market level and of its
evolution, by putting together the irrational and institutional approaches.
if the first investors who came into the market can convince new investors to come into it
to buy the titles owned by the first investors. For some authors, this process appears
because of herding, whereas for others it results from mimetic behavior (herding being
only a very special case). In the second case, the Ponzi process can appear only if the
main opinion is very optimistic or pessimistic; it is not sufficient that few investors sell.
A financial convention is established to justify high increases in asset-price and to
persuade new investors to come into the market. When this process is started, it will
necessarily finish in a brutal way because it is impossible for the economy to provide
more and more funds to sustain the Ponzi process. This second approach (the mimetic
approach) is very fruitful because it combines several explanations and takes account of
the social context in which investors evolve. It is, however, difficult to understand how
uncertainty and institutional and psychological factors are combined to explain the
market price. The following gives a coherent explanation of the market level and of its
evolution, by putting together the irrational and institutional approaches.
http://business.fullerton.edu/finance/jour...n01/v15p041.pdf
Further evidence on real estate market efficiency - Are housing price cycles driven by irrational expectations?
Journal of Real Estate Research, The, 1998 by Clayton, Jim - Doc type (.pdf)
Further evidence on real estate market efficiency - Are housing price cycles driven by irrational expectations?
Journal of Real Estate Research, The, 1998 by Clayton, Jim - Doc type (.pdf)
http://www.jchs.harvard.edu/publications/f...et_behavior.pdf
UNDERSTANDING MORTGAGE MARKET BEHAVIOR: CREATING GOOD MORTGAGE OPTIONS FOR ALL AMERICANS
By Ren S. Essene and William Apgar April 25, 2007 - Doc type (.pdf)
http://www.jchs.harvard.edu/publications/markets/w07-3.pdf
Why Do House Prices Fall?
Perspectives on the Historical Drivers of Large Nominal House Price Declines
Daniel McCue and Eric S. Belsky June 2007 - Doc type (.pdf)
UNDERSTANDING MORTGAGE MARKET BEHAVIOR: CREATING GOOD MORTGAGE OPTIONS FOR ALL AMERICANS
By Ren S. Essene and William Apgar April 25, 2007 - Doc type (.pdf)
http://www.jchs.harvard.edu/publications/markets/w07-3.pdf
Why Do House Prices Fall?
Perspectives on the Historical Drivers of Large Nominal House Price Declines
Daniel McCue and Eric S. Belsky June 2007 - Doc type (.pdf)
House Prices and Housing Investment in Sweden and the United
Kingdom.Econometric Analysis for the period 1970 – 1998
http://www.konj.se/download/18.110c31f2266...fff181/wp80.pdf
Identifying Credit Risk Exposure
http://www.poulinhugin.com/credit.pdf
House Price Dynamics and the Business Cycle
http://www.frbsf.org/publications/economic...2/el2002-13.pdf
House Price Bubbles John Krainer
http://dfm.idaho.gov/Publications/EAB/Fore...ticle_Apr03.pdf
Identifying Asset Price Bubbles in the Housing Market in India - Preliminary Evidence
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/73533.pdf
Kingdom.Econometric Analysis for the period 1970 – 1998
http://www.konj.se/download/18.110c31f2266...fff181/wp80.pdf
Identifying Credit Risk Exposure
http://www.poulinhugin.com/credit.pdf
House Price Dynamics and the Business Cycle
http://www.frbsf.org/publications/economic...2/el2002-13.pdf
House Price Bubbles John Krainer
http://dfm.idaho.gov/Publications/EAB/Fore...ticle_Apr03.pdf
Identifying Asset Price Bubbles in the Housing Market in India - Preliminary Evidence
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/73533.pdf
Bubble, Bubble, Where’s the Housing Bubble?
http://www.smithfinancialplace.com/PF/brookings.pdf
'mark-to-model' housing prices
->projection Values
->assumptions about future prices
->unrealistic/realistic expectations about future prices
->price projections
'mark to market' housing prices
->homeowner is ready to sell
->market prices
http://www.smithfinancialplace.com/PF/brookings.pdf
QUOTE
Admittedly, there are other considerations that make renting and owning a different experience.
Renters may have different preferences (in paint colors and furnishings, for example) than do
their landlords; renters cannot reap the full benefits of improvements they make to the property
inside and out; and renters may have less privacy than do owners. These are all arguments for
why owning is better than renting and, to the extent they matter, our calculations underestimate
the value of homeownership. Both renters and owners also confront uncertainty—renters about
future rents and housing prices, too, if they might buy a house in the future; owners about future
homeownership expenses and future housing prices if they might someday sell their house and
move to a location with different rents and prices.
Renters may have different preferences (in paint colors and furnishings, for example) than do
their landlords; renters cannot reap the full benefits of improvements they make to the property
inside and out; and renters may have less privacy than do owners. These are all arguments for
why owning is better than renting and, to the extent they matter, our calculations underestimate
the value of homeownership. Both renters and owners also confront uncertainty—renters about
future rents and housing prices, too, if they might buy a house in the future; owners about future
homeownership expenses and future housing prices if they might someday sell their house and
move to a location with different rents and prices.
'mark-to-model' housing prices
->projection Values
->assumptions about future prices
->unrealistic/realistic expectations about future prices
->price projections
'mark to market' housing prices
->homeowner is ready to sell
->market prices
http://www.cs.princeton.edu/courses/archiv...klemperer94.pdf
Rational Frenzies and Crashes
However, in the real world, buyers and sellers can choose when to
trade: Our main point is that when agents make this choice strategically,
a small event can trigger a very large volume of trade. A large
volume of trade then reveals a large amount of information and can
result in a large price change. Furthermore, in contrast to the recent
models of "herding" (see, e.g., Banerjee 1992; Bikhchandani, Hirshleifer,
and Welch 1992), our results occur even when all agents have
independent values of the traded good.
We analyze a simple dynamic model of market clearing with a seller
who has a fixed supply and a group of buyers who each have an
independent value for a single unit. The seller calls out a price, and
buyers then simultaneously announce whether they are willing to pay
that price. If demand is positive but less than or equal to supply, the
seller satisfies the demand and reoffers any remaining units at the
same price. If demand is zero, the seller reduces price continuously
until a buyer is found. If demand exceeds supply, then no transactions
take place and the seller asks a higher price.
We show that this model yields "frenzies," in which a single purchase
at a given price causes many other customers to come forward
to offer the same price. A second prominent consequence is
"crashes," in which it becomes common knowledge immediately after
a frenzy that no further buyers will be willing to pay anything close
to the price at which the frenzy took place. A further result is that
the price path is highly sensitive to small changes in the underlying
demand structure: transaction prices are neither continuous nor
monotonic in buyers' reservation values.
Rational Frenzies and Crashes
However, in the real world, buyers and sellers can choose when to
trade: Our main point is that when agents make this choice strategically,
a small event can trigger a very large volume of trade. A large
volume of trade then reveals a large amount of information and can
result in a large price change. Furthermore, in contrast to the recent
models of "herding" (see, e.g., Banerjee 1992; Bikhchandani, Hirshleifer,
and Welch 1992), our results occur even when all agents have
independent values of the traded good.
We analyze a simple dynamic model of market clearing with a seller
who has a fixed supply and a group of buyers who each have an
independent value for a single unit. The seller calls out a price, and
buyers then simultaneously announce whether they are willing to pay
that price. If demand is positive but less than or equal to supply, the
seller satisfies the demand and reoffers any remaining units at the
same price. If demand is zero, the seller reduces price continuously
until a buyer is found. If demand exceeds supply, then no transactions
take place and the seller asks a higher price.
We show that this model yields "frenzies," in which a single purchase
at a given price causes many other customers to come forward
to offer the same price. A second prominent consequence is
"crashes," in which it becomes common knowledge immediately after
a frenzy that no further buyers will be willing to pay anything close
to the price at which the frenzy took place. A further result is that
the price path is highly sensitive to small changes in the underlying
demand structure: transaction prices are neither continuous nor
monotonic in buyers' reservation values.
http://www.tinbergen.nl/discussionpapers/02003.pdf
http://www.essex.ac.uk/ilr/discussion/ILRdps53.pdf
http://www.jrf.org.uk/knowledge/findings/h...ng/pdf/2064.pdf
http://www.jrf.org.uk/bookshop/eBooks/1967...and-markets.pdf
http://www.communities.gov.uk/documents/housing/pdf/325850
QUOTE
Changes within households are, however, not the only reason for moving
residence. Another important reason why households move is formed
by changes in the housing market. The booms and busts of the housing
market in Britain clearly revealed that changes in average house prices affected
residential mobility (Henley, 1998). Residential mobility can be for
portfolio reasons in that households change tenure or move up the housing
ladder. Also, households have used residential mobility to release their
equity, i.e. the property value minus mortgages (Henley, 1998). Deurloo
et al.(1987) report that movements of owners are generally more related to
capital accumulation than to any specific housing needs.
residence. Another important reason why households move is formed
by changes in the housing market. The booms and busts of the housing
market in Britain clearly revealed that changes in average house prices affected
residential mobility (Henley, 1998). Residential mobility can be for
portfolio reasons in that households change tenure or move up the housing
ladder. Also, households have used residential mobility to release their
equity, i.e. the property value minus mortgages (Henley, 1998). Deurloo
et al.(1987) report that movements of owners are generally more related to
capital accumulation than to any specific housing needs.
http://www.essex.ac.uk/ilr/discussion/ILRdps53.pdf
http://www.jrf.org.uk/knowledge/findings/h...ng/pdf/2064.pdf
http://www.jrf.org.uk/bookshop/eBooks/1967...and-markets.pdf
http://www.communities.gov.uk/documents/housing/pdf/325850
http://www.fdic.gov/news/news/speeches/cha.../spapr1707.html
Securitization Structure
Securitization Structure
http://www.anderson.ucla.edu/faculty/edwar...3588-w13428.pdf
HOUSING IS THE BUSINESS CYCLE
When the market cools, however, only a few prospective buyers come to our front doors, and those
prospective buyers bring a most unsettling message: “We know you love your home, but
it isn’t worth nearly as much as you think.” That can be a deal-breaker for female
owners, but the clincher for males is the fact that their idiot neighbor sold his home for $1
million just last year, and the male owner is not going to take a penny less than that. It
doesn’t matter what the market thinks. This house is worth $1million. Period.
The housing starts data available from the Census Bureau begin in 1959 and leave us wondering what happened earlier, but in searching for references I ran across the image to the right of the earlier data in Ketchum(1954). Look at that: housing starts declined beginning in 1925! Industrial production didn’t begin its nosedive until July 1929 and the Dow Jones Average peaked in October 1929. How weird is that! Problems in housing led the great depression by a full three years. Without doing the hard work to confirm, it seems possible that the increase in the discount rate in 1928 was very hard on an already weakened housing sector, and set in motion the events that led to the Great Depression, dropping housing starts dramatically from over 900 thousand in 1925 to under 100 thousand in 1933. My point here, however, is that we should be looking for the roots of this episode in the operation of the banking system in 1922-1924 which allowed housing starts to peak so high But, of course, I must defer to Bernanke’s(2000) Essays on the Great Depression, which does not emphasize housing.
http://www.telegraph.co.uk/money/graphics/...3/cnrock113.pdf
Lessons from the 2007 financial crisis∗
HOUSING IS THE BUSINESS CYCLE
When the market cools, however, only a few prospective buyers come to our front doors, and those
prospective buyers bring a most unsettling message: “We know you love your home, but
it isn’t worth nearly as much as you think.” That can be a deal-breaker for female
owners, but the clincher for males is the fact that their idiot neighbor sold his home for $1
million just last year, and the male owner is not going to take a penny less than that. It
doesn’t matter what the market thinks. This house is worth $1million. Period.
The housing starts data available from the Census Bureau begin in 1959 and leave us wondering what happened earlier, but in searching for references I ran across the image to the right of the earlier data in Ketchum(1954). Look at that: housing starts declined beginning in 1925! Industrial production didn’t begin its nosedive until July 1929 and the Dow Jones Average peaked in October 1929. How weird is that! Problems in housing led the great depression by a full three years. Without doing the hard work to confirm, it seems possible that the increase in the discount rate in 1928 was very hard on an already weakened housing sector, and set in motion the events that led to the Great Depression, dropping housing starts dramatically from over 900 thousand in 1925 to under 100 thousand in 1933. My point here, however, is that we should be looking for the roots of this episode in the operation of the banking system in 1922-1924 which allowed housing starts to peak so high But, of course, I must defer to Bernanke’s(2000) Essays on the Great Depression, which does not emphasize housing.
http://www.telegraph.co.uk/money/graphics/...3/cnrock113.pdf
Lessons from the 2007 financial crisis∗
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