Is This Another Housing Bubble?
Posted at 2:30 p.m. on Jan. 29
Karl Smith thinks a new bubble is building in the US housing market: “I think of liquidity interactions and positive feedback. The more willing your neighbor is to buy a house the more willing you should be as well… your neighbors’ willingness to buy a house lowers the cost to you of buying the house… And, now that you are more willing to buy the house, this should make your neighbor even more willing to buy the house… This process builds on itself until everyone really wants to buy the house.”
Ryan Avent thinks this analysis mistakes what it means to be in a bubble: “First, a liquid market need not necessarily be an appreciating market. In places with very elastic housing supply, like Texas, sales may soar without translating into rising prices thanks to surging construction—a supply effect that dampens the feedback mechanism.”
“And second, as we saw so clearly during the bust years liquidity today need not imply liquidity tomorrow. More sales in the present will only attract a growing flow of buyers if high sales levels are expected to be sustained.”
