What a Bubble Looks Like

I’m sure Casey Mulligan has done some good work somewhere, because he seems to be pretty prominent, but in his time as an amateur pundit he sure does write some dumb stuff. For example, a post titled “Was It Really a Bubble?” has this opening paragraph:

Adjusted for inflation, residential property values were still higher at the end of 2009 than 10 years ago. This fact raises the possibility that at least part of the housing boom was an efficient response to market fundamentals.

It’s hard to know what it would mean for market prices to not be “at least in part” driven by fundamentals. It’s also hard to see why this would contradict the notion that there was a housing bubble. Yesterday we read a transcript in which a Fed staffer said:

I don’t want to leave the impression that we think there’s a huge housing bubble. We believe a lot of the rise in house prices is rooted in fundamentals. But even after you account for the fundamentals, there’s a part of the increase that is hard to explain.

And as I wrote yesterday, that’s what a bubble is—an increase that can’t be explained in terms of the fundamentals. Mulligan gives us a different phrasing of the same point, an increase whose magnitude can’t be explained by the fundamentals. In other words, a bubble. But he wants to say it wasn’t really a bubble since “at least part of the housing boom was an efficient response to market fundamentals.” He even has a chart!


When I look at that chart, I see a bubble. It’s a picture of a bubble inflating and then bursting. The cost of housing increases over time because there are supply constraints in many desirable areas and because income increases. This is reflected in the fact that both home prices and rents have an overall upward trajectory over time. But for a while home prices were soaring much faster than rents, then prices crashed. That was the bubble.