UNDERNEWS

Undernews is the online report of the Progressive Review, edited by Sam Smith, who covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

August 29, 2009

LOCAL HEROES: DEAN BAKER AND THE HOUSING BUBBLE.

Even after a major crisis such as the current fiscal crisis, the conventional media, politicians and think tankers continue to follow the advice of those who got us into the mess and ignore those who tried to prevent it. That's why you'll find crash enablers like Lawrence Summers and Robert Rubin being quoted and invited to the White House while you hardly hear mention of Brooksle Born, Sheila Blair and others who tried to point out the rocks ahead. Add to the latter list economist Dean Baker. Open Left notes that "in 2002, economist Dean Baker, co-director of the Center for Economic Policy Research, wrote a prophetic briefing paper, The Run-up in Home Prices: Is It Real or Is It Another Bubble? 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. . . 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. []

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