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 [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
