One-Sided View of Housing Bubbles to Surface

To people who heard Fed Chairman Alan Greenspan speak in Jackson Hole, Wyo., at the end of last week, the housing boom will “simmer down.” But to those viewers at home watching “CBS Evening News,” housing is in a bubble and bubbles typically burst.

The August 27 CBS broadcast began with a scary introduction by reporter Bob Orr asking, “Is the roof about to fall in on the hot condo market?” Later, a segment on house hunting opened with a graphic entitled “Condo Bubble” and a brief restatement of what Greenspan said. Anchor Russ Mitchell then turned the story from a discussion of housing growth to more bubble time by dwelling on the “condominium bubble” “showing signs of being overstretched.”

Greenspan addressed housing in a more reasoned manner, but that didn’t earn him much attention in the CBS report. The August 28 New York Times explained Greenspan’s position. “In Mr. Greenspan's view, the housing market will inevitably ‘simmer down,’ and sales and prices are all but certain to slow. ‘House turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease,’ he said.”

Orr took over and had a quick conversation with two would-be condo buyers who had failed in their hunt. The doom-and-gloom report pointed out that there “are signs the condo market is cooling off” and that the market actually fell in July.

To reinforce this position, he talked with Dean Baker, an “economist” with the Center for Economic and Policy Research. Baker didn’t let him down. He immediately used the B word. “We are seeing a bubble,” said Baker.

Baker criticized investors who were buying condos to resell or “flip” them. “It's very, very risky. You know, it's just like buying into the Nasdaq in 1999,” Baker added.

Orr didn’t mention that, while houses can drop in price, they are real assets and seldom lose all or most of their value. Comparing the housing market to the stock market is faulty. Housing markets are regional – there is no centralized trading floor where national prices might drop sharply. Though housing prices may change, most homeowners will retain their homes as a source of savings, continuing to build equity.

Orr never let on that Baker was not a neutral observer. Baker is co-director of CEPR and has claimed the United States has had a housing bubble since 2002. According to an article Baker wrote on Aug. 5, 2002, “the economy has now developed a third bubble, the collapse of which also poses a serious danger to the economy. The third bubble is in the housing market.”

Baker has written numerous times on the topic since then, continuing to argue that there is a bubble even as both single-family homes and condos have seen major growth in their value each year. Now he claims that there is a bubble and it will cause serious economic harm. According to the CEPR Housing Bubble Fact Sheet: “Given how far out of line house prices have grown from fundamentals, there is no way to avoid enormous economic damage when the bubble collapses.” Baker supported a fall in prices in the fact sheet. “However, the quicker house prices revert to more normal levels, the less damage there will be.”

In a recent Free Market Project commentary, economist Gary Wolfram disputed that position. “The only time we can say that the price of a good or service is ‘too high’ is when there is a lot of it piling up and no one is buying it,” he stated.

The CEPR Web site said Baker “has written numerous books and articles, including Social Security: The Phony Crisis.” It also said he has a forthcoming book with left-wing economist Paul Krugman. Baker has been a long-time critic of President George W. Bush and wrote a piece in May 2002 called “Attack of the Clowns: The real Bush is back” where he accused Bush of “crony capitalism” and said “the White House is running a scam for his rich friends.” But the housing bubble remains a popular issue for Baker and even has its own special section on the organization’s Web site. Despite his strong, published views on politics and the economy, CBS simply identified Baker as an “economist.”

Although Orr interviewed a representative from the National Association of Realtors who talked about the strength in the condo market, the report stayed downbeat. Orr explained that “talk of a crash is premature,” but even by saying “premature” he gave the impression that such potential looms. To emphasize that, he ended his story as he began, with comments about “a bubble.”