Experts at the Washington, D.C.-based Center for Economic and Policy Research, who have long touted the current housing boom as a bubble, have selected the winner of an essay contest aimed at bursting their bubble theory.
Hilary Croke, a Federal Reserve Board employee, wrote a four-page essay expressing her personal view that while the inflation of housing costs is expected to decelerate, “a collapse commensurate with previous asset price bubbles is unlikely.”
The Center for Economic and Policy Research, which focuses on economic and social issues, launched the essay contest in January. Entrants were asked to explain: “Why there is no housing bubble.”
Croke’s essay, which includes accompanying charts and tables with housing statistics, notes that demand for housing “has increased substantially,” housing inventories are low, and tax incentives, low interest rates and a growth in the mortgage lending industry have made home ownership more accessible. Also, real estate “has become an increasingly attractive investment option,” Croke noted.
Increasing house prices could be attributed, in part, to an increase in the quality of housing, she also noted, and the median size for new one-family houses completed has increased from 1,525 square feet in 1972 to 2,114 in 2002, with newer homes more likely to contain more bedrooms, bathrooms and to have air conditioning systems.
In a two-page refutation to this essay, center co-director Dean Baker, who received a doctorate degree in economics from the University of Michigan, wrote, “The fact that people are borrowing against their homes at a rapid rate (more than $750 billion in 2003) is more evidence of an unsustainable bubble. The ratio of mortgage debt to home equity is at record highs. This fact is especially scary given that equity values may be inflated by as much as 20 to 30 percent as a result of the housing bubble, and that the nation’s demographics (with the baby boomers approaching retirement) suggest that many homeowners should have largely paid off their mortgages.”
He also argues that new homes are being built “faster than can be supported by population and income growth,” and that the nation is headed for a $2 trillion to $3 trillion loss in housing wealth, “and a downturn that is even worse than the fallout from the stock market crash.”

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