Mark Thoma has posted a nice little piece by his colleague Tim Duy on what a housing bubble looks like (as in charts, not in those “what were they thinking” pictures of overpriced shoeboxes now going begging).
It illustrates very nicely the most basic symptom of pricing gone awry: how housing prices hit unprecedented highs in relationship to local incomes.
The two communities are Eugene and Bend. In 2000, median home prices were three times median incomes. But what a difference a few years makes. From Duy:
In both cases, the distribution of home values shifted to the right, but the magnitude of the shift in Bend is quite stunning. The median home value in Eugene in 2006 was $224,900, about four times median family income. The median home value in Bend was $345,400 – just under six times the median family income.
The local story is that the Bend area will always attract a steady stream of wealthy California retirees with plenty of wealth. If this were true, I cannot understand why so many of these recent migrants are desperate to leave…..
While there is truth to the underlying story that Bend is attractive to retirees, and is a very pleasant place to live, work, and play, that story clearly does not justify median home prices at six times median incomes. Bubble, plain and simple, and now there is a rush for the exit.
What strikes me most in these charts is the massive misallocation of capital during the last six years. The housing stock in Bend was twisted in a direction that is fundamentally misaligned with the community income profile. True, this happened in many places – I would argue that home prices in Eugene are also misaligned, although to a lesser degree. But the magnitude of the misalignment in Bend is quite remarkable, and in my mind represents a complete failure of social policy. This is especially the case when policy has turned homeownership into a moral imperative, creating a culture that equates renting with failure and granite countertops with success.
In these charts I see the immense damage done to everyday Americans by allowing an asset bubble to propagate unchecked…..
I will be surprised to see real, effective regulation emerge until the Fed is divorced from the very unfortunate marriage to the fetish of liquidity that allows policymakers to turn a blind eye to the unquestionably damaging bubbles spawned by that marriage.
She also has a colorful discussion of the Fed’s lack of interest (beyond mere curiosity) in preventing bubbles and in regulation generally.