Reasonable People Did Disagree: Optimism and Pessimism about the U.S. Housing Market before the Crash

August 16, 2010 – (RealEstateRama) — Gerardi, Foote, and Willen look at economists’ assessments of the housing market prior to its collapse to see whether they saw signs of a bubble. While some economists did warn of a bubble, this was a minority view. Other economists advanced well reasoned counterarguments. All told, most economic research took an agnostic view of the housing market. There was some evidence that house prices were high relative to previous benchmarks, but this evidence did not necessarily imply that house prices would fall in the future. Given economists’ theoretical disposition, the empirical evidence on house prices in the early-to-mid 2000s was simply not strong enough to convince most economists that the U.S. housing market was a bubble that was destined to pop someday. Looking forward, the authors are doubtful that bubbles can be identified and prevented in real time. Policy should emphasize educating potential homeowners and investors of the risks and ensuring that the system is more robust to possible price declines.

Full paper: http://www.bos.frb.org/economic/ppdp/2010/ppdp1005.htm

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