Thursday, January 15, 2015

I guess I will start an econ blog

I got some sleep the past three nights, and crazy stuff is happening in the world- so lets start an econ blog that will get way off topic and degenerate into petty sniping (assuming I even get a reader) before disappearing into the ether 2 months from now. 

Kevin Erdmann at Idiosyncratic Whisk has some posts which basically argue there was no housing bubble.  Instead of arguing in the comments of Marginal Revolution I started this blog to argue across them. 

Here is a graph from IW*-

 Kevin (to familiar?) argues that there is a stable trend line of real estate value in the US- at roughly 8% annual growth.  Visually it appears stable, conceptually it is clearly not stable.  Why?  Because its a log graph, which smooths what is an exponential curve into a straightish line.  An 8% growth rate in an economy doing under 5% is probably* not going to be stable over a long period of time.  To illustrate this we can pull another graph from a different post of Kevin's on housing

Look at the blue line- that is mortgage debt to GDP.  This line is clearly not stable from around 2000 to 2006/2007. 

Kevin Asks about the 1st graph- "What looks more out of line?  The 2000's or the 2008-2014 period?"- the second graph clearly shows that "something" was out of line in the 2000s, we can disagree on what, but I can't see an argument for calling perpetual 8% growth in housing "stable" in the US.

"I argue that frictions in home supply were creating a supply shock in the 2000s, which was creating supply-based inflation."- Ok lets explore that with the data you provide plus a little context.

Housing starts

Ok- So eyeballing this chart we have much higher housing starts in the 70s/80s than we had in the 90s, but that doesn't mean a supply shock- that could just as easily mean a demand shock.  Here is a graph that points in that direction. 

Average household size in the US

The green line (US average household size) shows a leveling off after a long (60 year) decline.  Now you could argue this two ways- one is that the supply shocked limited the number of houses available and stopped the decline, but I think that is a very weak position to take given how family structure tends to work it seems pretty unlikely that the average household size should be only a hair above 2 people (and still falling). 

* I'm just linking directly to his blog instead of posting my own image, I have serious doubts that my viewership will ever reach a point where this is a problem.
**you can come up with scenarios, but they don't appear realistic in my view.

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