Speculation Drives The Bubble – “This boom was driven not by a sense that it was temporary, it was driven by a sense of a new reality, that home prices would just always go up at 10% a year.”

From video excerpt of a talk by Robert Shiller on the US housing market, at the Schwartz Center For Economic Policy Analysis, 18 Feb 2009. [full talk here].

[at 3:41min] “All of a sudden, in the early 2000s there is this huge boom, and then sudden collapse. Now, it’s partly due to the sub-prime lending revolution, and that’s why the low tier homes went up the most. But I wouldn’t blame it on the sub-prime revolution, because sub-prime primarily effects low price homes, and you see the high priced homes in the same boom. Moreover, I think the sub-prime revolution is in some sense a consequence of the housing bubble… people got so excited about housing, the lenders believed it too.. thinking they were doing these low income borrowers a great favour by getting them into a mortgage. .. They all believed that home prices were going to just go up and up… I know they believed this because [we did questionnaires about expectations]. The mean [home buyer] expectation in LA at the peak of the market was 23% per year for the next ten years.. that’s what people told us… about a third of the people were just wacko about this.. you know it just can’t be right. [comment on compound interest].
This boom was driven not by a sense that we were in a temporary boom, that you want to get out of, it was driven by a sense of a new reality, that home prices would just always go up at 10% a year… it ain’t so, prices don’t do that… people got this crazy idea…”

“This is Las Vegas… isn’t that amazing?… Las Vegas, which is the gambling centre of the country… All of a sudden, wham… In a lot of the cities, the prices are back.. the bubble is over.. the concern now is whether we’ll overshoot.”

10 responses to “Speculation Drives The Bubble – “This boom was driven not by a sense that it was temporary, it was driven by a sense of a new reality, that home prices would just always go up at 10% a year.”

  1. Murphy’s Law


    Of course, Capt. Murphy forgot to add one crucial parameter to his infamous aphorism – at least in so far as complex conglomerate systems are concerned…

    At the worst possible moment.

    • Case in point..

      [NYT] – Explosion Rocks Japan Nuclear Plant After Quake


      Coastal property just got cheaper.


      • In the prior NYT link [since updated/’revised’ to ‘Nothing To See Here’ status] – the following paragraph nevertheless escaped the censors’ scissors…

        “…Although safety officials described the release of radioactive materials as small, they also told the International Atomic Energy Agency that they were making preparations to distribute iodine, which is used to help protect from radiation exposure…”

        Actually, it isn’t ‘iodine’, but rather KI …

        [WikiPedia] – Thyroid protection from iodine-131 in fission accidents and emergencies


        Additionally, although briefly mentioned in the ‘revised’ NYT article – the following, courtesy of Reuters, is more telling:

        “Edano initially said an evacuation radius of 10 km (6 miles) from the stricken 40-year-old Daiichi 1 reactor plant in Fukushima prefecture was adequate, but then an hour later the boundary was extended to 20 km (13 miles). TV footage showed vapor rising from the plant…”

        [Reuters] – Radiation leaks from Japan’s quake-hit nuclear plant


      • Well, it’s now about ‘official’ as it’s likely to get…

        [BusinessIntelligenceMidEast] – Japanese government confirms meltdown at nuclear plant

        “INTERNATIONAL. Japan’s Nuclear and Industrial Safety Agency (NISA) said March 12 that the explosion at the Fukushima Daiichi No. 1 nuclear plant could only have been caused by a meltdown of the reactor core, Japanese daily Nikkei reported. This statement seemed somewhat at odds with Japanese Chief Cabinet Secretary Yukio Edano’s comments earlier March 12, in which he said “the walls of the building containing the reactor were destroyed, meaning that the metal container encasing the reactor did not explode.” NISA’s statement is significant because it is the government agency that reports to the Agency for Natural Resources and Energy within the Ministry of Economy, Trade and Industry. If this report is accurate, it would not be the first time statements by NISA and Edano have diverged. When Edano earlier claimed that radiation levels had fallen at the site after the depressurization efforts, NISA claimed they had risen due to the release of radioactive vapors.”


      • For continuous updates on high altitude/northern hemisphere jetstream flows/currents – see prior link [Sanfrancisco State University Dept. of Meteorology] under ‘coastal property just’….

      • “This boom was driven not by a sense that it was temporary, it was driven by a sense of a new reality…”

        Speaking of things that go, “Boom!” and ‘new realities’…

        [AlJazeera] – Second blast at Japan nuclear plant – Eleven injured but Japan’s nuclear safety agency says there is “absolutely no possibility of a Chernobyl” style mishap.

        [for the record, the ‘second blast’ was actually comprised of three distinct detonations – and when public authorities start saying things like, “Absolutely no possibility…” – rest assured, they’re talkiing through their collective anal sphincters]


        Evidently, COMPACFLT is somewhat less sanguine about developments…

        [AP/AJC] – US pulls ships, aircraft from Japan nuke plant

        “TOKYO — The U.S. Seventh Fleet said Monday it had moved its ships and aircraft away from a quake-stricken Japanese nuclear power plant after discovering low-level radioactive contamination.”…


      • Further to US Navy 7thFleet vessel disposition/movements [not to be confused with other ‘movements’]…

        [NYT] – Military Crew Said to Be Exposed to Radiation, but Officials Call Risk in U.S. Slight

        “The Pentagon was expected to announce that the aircraft carrier Ronald Reagan, which is sailing in the Pacific, passed through a radioactive cloud from stricken nuclear reactors in Japan, causing crew members on deck to receive a month’s worth of radiation in about an hour, government officials said Sunday… In interviews, some private nuclear experts called a windborne threat unlikely. Others urged caution… “We’re all worrying about it,” said Robert Alvarez, a nuclear expert who, from 1993 to 1999, was a policy adviser to the secretary of energy, who runs the nation’s nuclear complex. “It’s going to be very important,” he added, “for the Japanese and U.S. authorities to inform the public about the nature of the plumes and any need for precautionary measures.”


        Meteorological autodidacts may enjoy the following interactive animation of the jetstream/northern hemisphere, courtesy of Sanfrancisco State University….


  2. An ardent believer in the ‘precautionary principle’, Capt. Murphy is most fondly remembered (in aviation circles) for his pioneering crew escape systems in ‘gizmos’ like these…



  3. 4SlicesofCheese

    This is another great vid, from 2006!
    Although the specific details are different than Canada, the peoples way of thinking, and actions are eerily similar.

    Ironic that it was a mortgage bankers speech

  4. Pingback: Macleans: “Two charts you need to see about commodities and the housing market”; Shiller on the psychology of housing bubbles | Financial Insights

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