Media Myths: The Housing
Bubble Is Bursting
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Media claims about a “housing bubble” are nothing new. Since
before the 9/11 terror attacks, the media have been calling the
housing market a “bubble” while predicting an imminent, devastating
decline. Not only have they been wrong in forecasting such a top,
they have thoroughly mischaracterized what an investment bubble is.
Now that the market for homes has finally slowed a bit, the media
are declaring the bubble has burst.
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A Bubble?: Fed Chairman Alan Greenspan has denied the existence of a
national housing bubble for several years, but the media have used
the term repeatedly.
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Strong Gains: The increase in real estate values the past five years
has not resembled the rapid rise typically seen in a bubble. In
2000, the national median existing-home value was $139,000. This
grew to $215,900 by the third quarter of 2005 – a 55-percent nominal
increase but a 34-percent inflation-adjusted gain.
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Home Sales Still Going Up: New home sales jumped another 13 percent
in October. While sales of existing homes were down 2.7 percent from
September, the median national price rose to $218,000, a 16.6
percent increase since October 2004.
By Noel Sheppard
Free Market Project
Nov. 30, 2005
    The media have been declaring America’s housing boom a
“bubble” for more than four years. Now every new report on home
sales is declared as more evidence that the bubble is bursting –
even when the news is good. |
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    On November 28, the National Association of Realtors
reported existing-home data for October, and although sales were
down 2.7 percent from September’s torrid pace, the median national
price rose to $218,000, a 16.6-percent increase since October 2004.
CNN’s Tony Harris on “Live Today” shared the news with his viewers:
“Has the housing boom gone bust? Just in this morning, existing home
sales fell in October more than 2 and a half percent.”
    Almost on cue, the Commerce Department
reported
new home sales data for October on November 29, and
last month’s data set a new record. As reported by Investors
Business Daily, “Rumors of the death of the U.S. housing market must
have been exaggerated.” What are the facts? “U.S. new home sales
jumped by 13 percent in October to a record 1.42 million seasonally
adjusted annual rate. This is the biggest rise since April 1993.”
And, how do these numbers compare to others this year? “October
sales smashed the previous record of 1.37 million set in July.”
    As the report continued, the following statement stood
out: “The sales figures seem to contradict anecdotal reports that
the housing market has cooled dramatically as mortgage rates rise
above 6 percent.”
Bubbly History
    Journalists have been talking about a housing bubble
since 2001. On September 3 of that year, Forbes magazine warned its
readers about the consequences of home equity values starting “to
wobble,” while stating, “There are ominous signs that this is about
to happen.” On the same day, a BusinessWeek editorial cautioned
about a “double bubble” and told its readers, “A housing bubble may
be developing – right behind the Nasdaq bubble.” Both indicated that
such an event would be devastating to the economy.
    What those reports failed to explain was that an
investment bubble occurs when an asset appreciates by extraordinary
percentages for a short period of time, culminating in a rapid
decline that wipes away most of the gains. A perfect example is the
NASDAQ stock index, which went from roughly 1,400 in October 1998 to
more than 5,000 in March 2000 (a 250-percent gain in less than 18
months), only to fall back to about 1,400 by October 2001 (a
70-percent decline in about 18 months). The housing market is less
liquid and prices don’t usually change quickly like stocks do.
    Four of 16 media reports in 2001 that referenced a
housing bubble were either written by or cited New York Times
economic columnist Paul Krugman. Of particular note was a September
30 Times article by Krugman entitled “Fear Itself” where he wrote:
“Housing was doing better, thanks to low interest rates, but some
analysts were warning about a housing bubble – and even if they were
wrong, how solid a recovery could we have from housing alone?”
    Average housing prices ended 2001 up 6.3 percent,
despite that prediction.
    By 2002, housing bubble references in the mainstream
media exploded to almost one a day and became much more commonplace
outside of business publications. Federal Reserve chairman Alan
Greenspan even was asked about this subject during his July 17
testimony before Congress. “We’ve looked at the bubble question, and
we’ve concluded that it is most unlikely, mainly because, one, we
have a very diverse real estate market throughout the country,”
Greenspan said.
    That didn’t quiet the media’s concerns. The Chicago
Tribune and USA Today ended the year by warning their readers about
the danger of a bubble. USA Today even warned of a possible
recession:
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“All the fuss about whether we’re facing a housing ‘bubble’ might be
compared to the argument over whether the world will end with a bang
or with a whimper. Some economic clairvoyants are waiting for a
‘bang’ – for housing prices, like tech stocks, to plummet.” Chicago
Tribune, Dec. 15, 2002.
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“That might be especially true now as real estate experts and
economists warn of possible housing bubbles – and a possible crash –
in the Bay Area and beyond. While home prices powered ahead for much
of the past year, there are signs of weakening. Median U.S. prices
peaked at $163,900 in June, but have fallen since. A big decline in
a handful of key markets could help drive the USA back into
recession.” USA Today, Dec. 16, 2002.
    The number of reports about the housing
bubble that involved or were written by Paul Krugman increased to 17
in 2002. His August 2 column even suggested that the Fed should, or
was planning to, create a bubble. He said that to fight recession,
the Fed “needs soaring household spending to offset moribund
business investment. And to do that, as Paul McCulley of Pimco put
it, Alan Greenspan needs to create a housing bubble to replace the
Nasdaq bubble. Judging by Mr. Greenspan’s remarkably cheerful recent
testimony, he still thinks he can pull that off.”
    Average housing prices ended 2002 up 5.7 percent.
    Such discussions became even more commonplace on TV in
2003. NBC’s “Today” began the new year on January 2 with Financial
Editor Jean Chatzky stating: “A lot of people are looking at the
housing market right now and saying, ‘Has it gone too far? Are we in
a housing bubble?’”
    This question dogged Greenspan in 2003. After he spoke
at the Ronald Reagan Presidential Library on April 10, the
Associated Press reported Greenspan as having said, “I personally
don’t think there is a housing bubble similar to that that exists in
stocks.”
    Average housing prices ended 2003 up an amazing 8.5
percent, despite bubble fears.
    By 2004, housing bubble discussions, as well as
predictions of an imminent collapse in prices, were showing up
throughout the media. As a result, any bad housing report became
important news. Kitty Pilgrim of CNN interjected this during her
December 23 stock market report on “Inside Politics”:
    “But now there are new signs of weakness in real
estate. New home sales fell 12 percent last month. And that was the
biggest decline in nearly 11 years. The new home sales report is the
second in a week, signaling a possible slow down. Last week housing
starts posted the biggest decline in 11 years.”
    What was Pilgrim’s conclusion? “Economists say that the
drop in sales, weak construction numbers – that could be a warning
sign of trouble ahead in the real estate market.” That November 2004
report ended up being an anomaly, and real estate sales continued
strong in the months that followed, as did the economy.
    ABC’s Mellody Hobson also went against Wall Street’s
wisdom on the issue, saying she was “a little skeptical” on the
December 22 “Good Morning America.”
    “They say that Wall Street analysts who are surveyed
are more bullish than they've been since January of 1987. Now we
know what happened at the end of that year,” Hobson said. “But
there’s some things that worry me. This deficit is out of control,
the war has not been going so well. Oil remains a wild card.
Interest rates, and rising interest rates specifically, could be the
pin that bursts the housing bubble.”
    Average housing prices ended 2004 up a whopping 9.3
percent – again defying predictions.
That Was Then; This Is Now
    As Alan Greenspan approached a well-deserved
retirement, a new Federal Reserve chairman was nominated in October
2005. He too questioned the existence of a housing bubble. As The
Washington Post
reported on October 27: “Ben S. Bernanke does not think the
national housing boom is a bubble that is about to burst, he
indicated to Congress last week, just a few days before President
Bush nominated him to become the next chairman of the Federal
Reserve.” Instead, these increases “‘largely reflect strong economic
fundamentals,’ such as strong growth in jobs, incomes and the number
of new households.”
    Still, the higher housing prices have gone, the
gloomier the press accounts have become. The Associated Press
reported on Nov. 11, 2005: “A downturn in housing could mean
more than 1.3 million lost jobs, Goldman Sachs Group Inc. predicts,
bumping up the national unemployment rate by 1 percent and the
unemployment rate in house-mad California by 2 percent.” Even more
disturbing in the article was this scary claim: “The Center for
Economic and Policy Research predicts worse, saying a bubble burst
would mean the loss of 5 million to 6.3 million jobs.”
    Three days later, CBS’s Julie Chen
reported on the “Early Show”: “Mortgage rates are at their
highest in more than two years, and many home owners are worried
that the real estate boom has finally gone bust.”
    Almost on cue, the National Association of Realtors the
following day
released housing numbers for the third quarter of 2005, showing
anything but a “bust”: “The national median existing single-family
home price was $215,900 in the third quarter, up 14.7 percent from
the third quarter of 2004 when the median price was $188,200.”
Conclusion
    It’s been more than four years since the media began
reporting bearish housing predictions in earnest. Yet real estate
values have forged ahead. As a result, the net worth of the average
citizen is now at an all-time high, well exceeding what Americans
enjoyed during the stock bubble years of the late ’90s and early
2000s. In addition, and maybe most importantly, close to 70 percent
of residential dwellings are now owned by one or more of the
inhabitants, also an all-time high.
    So who’s right about real estate – the media that have
been predicting a crash for more than four years, or past and future
Federal Reserve chairmen along with millions of Americans who have
bought a piece of the American dream during this run-up?
    So far, the answer is clear. However, given the
seriousness of this issue, and just how much impact the housing
market has on the rest of the economy, the media should learn from
this and present even-keeled reports that deal with how people
should invest their money.
Noel Sheppard is an economist, business owner, and contributing
writer to the Free Market Project. He is also contributing editor
for the Media Research Center’s
NewsBusters.org.
Noel welcomes feedback at
[email protected].
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