a question from the comments about housing graph

mr. ken looked at robert schiller’s graph of historical home prices i republished from the new york times and asked a logical question:

i always have to look at these kind of things and wonder… how did this person unearth such marvelous findings while others have spoken so passionately in argument of the exact opposite (in this case that there is no bubble)? are the “opponents” sufficiently motivated by greed or is the writer just pimping pulp? what is the truth, cap’n e? somewhere in between, i’m guessing.

i guess one way of answering this question is to provide links to the insider transactions for two of the nation’s biggest homebuilders, kaufman broad and toll brothers. if you look at the amount of selling that was done last summer, at what is now regarded as the peak of the market, you start to get a sense of the amount of money that was being made pushing the idea that we were in a “new paradigm” for real estate. these managers with access to the best realtime data about the US housing market were encouraging everyone else to buy houses and shares of their companies while they were aggressively selling. they needed buyers to take those houses and shares off their hands. the shares of those two companies both lost over 50% of their value over the following year. there were millions of players getting their piece of trillions of transaction and appreciation dollars, from agents to brokers to appraisers and speculators. why wouldn’t every property owner want to believe the story? it made them feel great about their financial acumen and their future. they could borrow against that skyrocketing equity and spend the money enjoying a richer quality of life.

whenever i read an article about the housing market, there is invariably a quote from david lereah, the chief economist for the national association of realtors. the title of lereah’s  book pretty much sums up what he and most realtors would like you to believe:  Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade—And How to Profit From Them. two of the key leading indicators for US house sales are published by this organization.

alan greenspan coined the phrase “irrational exuberance“. seth godin says that all marketers are liars, and consumers often believe the lies because they make them feel good about themselves. many commentators and economists  think house prices are a result of the federal reserve policies post dot bomb and 9/11 intended to reflate the economy.  my best guess, a layman’s opinion among many, is that it’s a combination of these factors.

i was just surfing around looking for supporting material and found this must-read article on wikipedia discussing the (alleged!) housing price bubble. it covers the topic more exhaustively and authoritatively than i ever could.