Housing Bubble, Again
By Arnold Kling
What makes the current frenzy especially dangerous is that every relevant institution has an incentive to play along. Who, after all, is likely to say stop? Not the realtors. Not the banks, any longer. Not Fannie and Freddie or the private secondary-mortgage operators, who are turning vast profits on the backs of the bubble.
In fact, Freddie Mac and Fannie Mae have an enormous incentive to not get caught in a bubble. So do the private mortgage insurance companies. If house prices collapse, then mortgage defaults will rise, and these companies stand to lose money.
Finally, the very group that is most blamed for a bubble–speculators–has an incentive not to overpay for houses. The speculators will lose during a bubble.
Will house prices hold up in every market in the country? That is unlikely, just as it is unlikely that stock prices will go up in every industry. However, the ratio of house prices to rents overall is sustainable.
For Discussion. Which local housing markets are most overheated, as indicated by price-to-rent ratios?