There Was No Housing Bubble in 2008 and There Isn’t One Now

Housing markets are red hot, with prices up more than 18% from November 2020 to November 2021. That’s an acceleration over the previous two years, which saw increases of 4% and 8% each. It’s also a faster rate than the U.S. experienced during the housing boom of the 2000s that preceded the Great Recession.

That comparison is causing some heartburn. “Are we in another housing bubble?” asked Mark Zandi, chief economist at Moody’s. The consensus, shared by Zandi, is that the answer is no — or, at least, that today’s bubble is different and less dangerous than the last one. Lending standards are more strict than they were 15 years ago, for example, which ought to mean that fewer homeowners are at risk of defaulting if prices fall.

CNN, though, found a reason for pessimism in that optimism. “The good news is that few economists believe that the current run-up in housing prices is a bubble that's about to burst, taking the economy down with it,” Chris Isidore of CNN Business wrote on Oct. 27, 2021 before adding ominously, “The bad news is that practically no one was worried about the housing bubble in 2007, either.”

But there’s another reason for sanguinity about the current housing boom: We may have misunderstood the last one all along.

The economists David Beckworth and Scott Sumner have argued that the timing of the last housing bust does not line up with the conventional wisdom that it played a central role in the recession that began in December 2007. The housing market peaked in early 2006, and sustained nearly two years of decline before the economy stopped growing as unemployment stayed low.

Kevin Erdmann — the author of a new book about housing, “Building from the Ground Up,” and a colleague of Beckworth and Sumner at George Mason University’s Mercatus Centerhas more recently challenged the claim that the U.S. built too many houses back then. He points out that spending on housing didn’t grow any faster than spending on other consumption goods during the boom (or the preceding decades). The notion that the price increases of 2000-2007 were unsustainable, he points out, also doesn’t match the experience of other countries. The U.K. had a larger increase, a shorter and less severe decline, and a stronger rebound.