As you may have gathered from my earlier diary, "Renormalizing Economics & Politics", I'm going to blogging alot about economics this weekend. A good part of this revolves around the ongoing economic crisis and the failure to foresee or comprehend it, as part of a larger failure of economic thought. This in turn is a reflection of the political success and practical failure of conservative hegemony. Some of the pieces have been in the works some time as part of somewhat different trains of thought, but they dovetail pretty well, nonetheless.
To begin with, I want to start small and simple, with the housing bubble, whose bursting underlay the eventual Wall Street collapse. But the staggering loss of household wealth since 2007 is reason enough to make this topic vitally important on its own.
In the end, Baker concluded "bubble". And bubbles eventually burst:
In the last seven years, home sale prices have increased nearly 30 percent more than the overall rate of inflation. Approximately one-third of this increase corresponds to an increase in the price of rental housing relative to other goods and services. The other two thirds is attributable to an increase in home purchase prices relative to rental prices.
This paper shows that there is no obvious explanation for a sudden increase in the relative demand for housing which could explain the price rise. There is also no obvious explanation for the increase in home purchase prices relative to rental prices. In the absence of any other credible theory, the only plausible explanation for the sudden surge in home prices is the existence of a housing bubble. This means that a major factor driving housing sales is the expectation that housing prices will be higher in the future. While this process can sustain rising prices for a period of time, it must eventually come to an end.
The following chart shows the relative rise in rents and housing prices:
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