Friday, July 16, 2010

Was it all a bubble?

Was all of the price increase a bubble? The price chart is from Zillow and all other charts are from Calculated Risk via Econbrowser.

I ask this because occasionally, I come across comments regarding auto sales and home sales such as the following:

"The seasonally unadjusted number of light vehicles sold in June was below the values for May or March and about the same as April. We still seem closer to the bottom than the top."

"Housing continues to lurch up and down with the expiration of tax credits. New home sales and pending home sales were both at record lows for May, while mortgage purchasing applications were near a 13-year low."

US Zillow Home Value Index

If I assume that at least some of the house price increase was due to fundamentals, for instance, up to 2003, and the rest was due to a bubble, then the above charts tell a different story than if we are trying to get our consumption back to its peak. Given that there was a consumption binge, do we really want the levels to go back to what they were in 2007? Given that there is now and excess supply of new homes, should we really expect sales of new homes to drive the economy and that mortgage applicatons and sales to return to pre-crash (or even pre-2003) levels? Assuming that consumers were highly in debt in order to buy cars, should we allow auto sales to return to their "normal" levels?

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