House bubble myopia: NY Fed edition

Courtesy of Mark the Graph:

I am back at uni doing some study. In my research for an assignment on financial econometrics I came across this wonderful piece from December 2004. It was written by a senior economist and a vice president at the Federal Reserve Bank of New York.

Home prices have been rising strongly since the mid-1990s, prompting concerns that a bubble exists in this asset class and that home prices are vulnerable to a collapse that could harm the U.S. economy.

A close analysis of the U.S. housing market in recent years, however, finds little basis for such concerns. The marked upturn in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates.

Moreover, weaker economic conditions are unlikely to trigger a severe drop in home prices. Historically, aggregate real home prices have fallen only moderately in periods of recession and high nominal interest rates.

It made me chuckle. It also had me wondering: Where have I read similar words about the Australian housing market more recently?

Of course the statements on the website of central banks and other government agencies need to be treated with some caution. They are rarely pieces of pure analysis. They are often written with an eye to potential market or social impacts. Sometimes the intent is to deliberately jawbone. And to be fair, this would have been the majority consensus opinion at the time.


  1. 🙂 Why does this sound familiar? Looks like there is a repeating pattern preceding these bubbles. Maybe they should introduce a Bubble101 subject at uni identifying statements like this as bubble signs. (Considering no other method seems to exist.)

    I certainly hope the vice president changed professions for everyone’s benefit.

    • BobTurkeyMEMBER

      Bubble101 would actually be a valuable subject in the real world.

      Sadly you really need to live through a few to get the hang of them.

      Gobble gobble.

  2. This is priceless. This is the “expert” saying “a crash won’t happen because I don’t think it will”. It’s not remotely science, it’s closer to low quality clairvoyance.

    I feel a major drop in house prices is coming to Sydney. This statement is as scientifically valid as the one from the fed 😉

  3. Once again my question: Does anyone still doubt whose interests FED and RBA etc. stands for?

    It is ridiculous for any intelligent person to believe that FED can care about anyone else, but banks, e.g. financial capital and financial markets. As long as those agents makes profits, nothing to worry about and they prove it with this article and many others and their so called stimulus, which are nothing but direct subsidies to the banks (financial capital) on the expenses of the rest of the real economy. Soon or later everyone will have to pay for their trip on the “Stairway to Heaven”, even we are paying indirectly.

    • Got to be to Heaven Lori as they do God’s work. And don’t forget wealth trickles down to the sheeple /sarc

      • Ironic that all but one of the people using ‘sheeple’ as a term of derision are following someone else’s linguistic lead.


  4. LOL! Brilliant! Just walked into my office 20 minutes ago (Perth time, for all you Easterners). Thanks for getting my day off with a hearty laugh!

    Although, considering this is almost verbatim what we’ve been hearing from his Australian counterparts, perhaps we should be weeping instead.

  5. A great find.

    Perhaps one day these blog posts will too be studied by future generations as they deal with the inevitable reformation of a housing bubble…. Short memories and the persistent belief that “this time it’s different”

  6. It is a pity there isn’t any collection of quotes like that from the USA, because there are plenty of them. There is a collection somewhere, of people who WARNED about the housing bubble over there; if I remember rightly there are dozens of them if you include those who were waking up closer to the crash, but there were some very good early warnings from 2002 onwards. The above “denial” clearly refers to “…..concerns that a bubble exists…..”

    One of the problems we have with these analyses, is that economists tend to say “there is no bubble” when prices are being “set by the fundamentals of supply and demand”. What they miss, in every case, is that “supply” is distorted. The great urban economist Alan W. Evans said in a book published in 2004:

    “……few economists have any interest whatsoever in planning. Their whole training leads them to ignore matters related to land and location, so they tend to consider only those factors conventionally considered “economic” – investment, training, labour relations, management, etc…..”

    People like Hugh Pavletich are right: the damage done by economists missing the role of urban land supply in property price volatility (even if their technical definition of a “bubble” is not fulfilled), is extremely damaging worldwide.

  7. “The marked upturn in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates.”

    Mod: dont snipe

  8. If you have to explain why it is not a bubble then it is one. ? 🙂

    I keep a gmail folder called Predictions. I am a humble financial adviser and have stuff going back to the 80’s. Some of it is looking priceless ! Like the AMP expert reassuring us all in late 2007 or Alan Kohler predicting a rise in the share market for 2008 “but not the 20% that we have been enjoying”. After doing this for so long one starts to get a sense of where the credibility lies…. just in time to retire 🙂

      • Schiff should get a Nobel prize or a job for life with the Fed or a freaking olympic gold medal.

        I love the footage of those Faux News muppets recommending buying Bear Stearns at $78 in 2007 and Schiff just shaking his head. Playing that footage should be required every time they want to give their next hot tip.

        • yeah and Washington Mutual! That interview is the definition of ‘value trap’

          If he continues to be right the US is in for a tough time…

          • We all have opinions but to get on national TV and say the emperor has no clothes in the face of personal abuse and be proved spot on deserves the highest commendation.

            Hail the King of Contrarians!

        • I just watched the video and it is amazing. Americans should build statues of P Schiff all over the country.

      • Thank you so much, this is unbelievable. Thank you. I haven’t had seen Arthur Laffer although I have being taught him many years ago. What a shame, he is so stupid. I am so disillusioned from Western economics, just can’t believe it. Thank you, Rich, you gave me back my self-respect, thank you.

  9. Hugh PavletichMEMBER

    Bubbles by definition are unsustainable and deflate at some stage. We can never predict when and how in individual cases of course. But sure as night follows say….deflate they will.

    There are some wonderful stories out there on the profound thoughts of the Authoties and economists on the “health” of the Irish and Spanish economies too, just before their housing bubbles peaked.

    I do hope the industrious MB team dredges up these and others for some entertaing reading.

    I covered a few stories of “bubble blindness within an article HOUSING BUBBLES AND MARKET SENSE some years ago –

    Incorporated within this article are the immortal words of John Alexander Smith, Professor of Moral Philosophy at Oxford University over 100 years ago –

    “Gentlemen –you are now about to embark on a course of studies that will form a noble adventure…..let me make this clear to you…nothing that you will learn in the course of your studies will be of the slightest possible use to you in afterlife – save only this – that if you work hard and intelligently, you should be able to detect when a man is talking rot, and that, in my view, is the main, if not the sole purpose of education.”

    Pity for RBA Governor Glenn Stevens and the AFR’s Chris Joye, the wider public today is rathr good at detecting “rot”.

  10. Hugh PavletichMEMBER

    And while we are having fun….another excerpt from HOUSING BUBBLES AND MATKET SENSE……

    An excellent brief article Perhaps Economists Should Be Picking Vegetables by Efrain Rojas, outlines the story of his poor parents, who were smart enough to avoid the bubble prices of California – only recently purchasing two houses there with no mortgages. Mr Rojas states –

    “It was abundantly clear to them that the housing market was insane and due for a catastrophic collapse, based upon the anecdotal evidence they saw around them i.e. half million dollar homes in places where people were lucky to make $10/hr. If you were an economist and did not see this coming, you should seriously reconsider the value of your education and maybe do something with a tangible value to society, like picking vegetables”.

    The question that needs to be asked is – why have Mr and Mrs Rojas (largely un schooled farm laborers of Southern California) more “market sense” than Dr Alan Greenspan, Dr Ben Bernanke and the vast majority of “schooled” economists, urban planners and property appraisers / valuers?

    • A person never sees the obvious when his livelihood depends on him not seeing?

      Naff really, coz the loss of livelihood is all the more severe later on.
      (except for Bernanke n Greenspan)

      • From Upton Sinclair, I believe, one of my favourite quotes:

        “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

    • At least partly because every dollar they get is earned the hard way, through sweat out in the fields. They know how hard it is for laboring folks to save, and how ridiculous half million dollar houses seem to such people.

      • Could also be the social & financial status of those who you socialise with affecting your view of what’s ‘normal’. That is, if the only people you regularly hang out with are all high earners half a million dollar houses seem reasonable to you. Chris Joye for example, comes from quite a well off background, went to elite private schools etc, and you can bet the people he socialises with are fairly similar, so it’s quite possible he believes his own BS about average household incomes being north of $100k.

  11. Because common sense and institutionalised education are, and always will be, mutually exclusive.

  12. Cliché, I know, but very true:

    “The funny thing about common sense is that it is not that common at all”.

    Hear hear.