The Housing Bubble:

Media Changing What It Reports

There's an economic bubble out there that makes the internet bubble look as threatening as grape-scented bubble bath. It threatens the entire economy. It's the housing bubble, with credible predictions of housing values dropping by 40% over the next decade. If that happens, your pocketbook will be hurting.

Maybe.

This will directly affect each of us - yes, even those who don't own homes… yet. People will still move for a host of reasons - including college students graduating and getting jobs. So should you buy, knowing there's a bubble out there? We're already saddled with student loans - why would we want to make things worse by getting negative equity right off the bat?

That's where Clark Howard steps in with some sound advice. The bubble in the United States is regional, and is much worse on the coasts than in the Midwest. That means that around Dayton, it still costs less to buy a house than renting the equivalent. On the coasts the situation is quite different. Where the bubble is worst, renting could be half as expensive as buying an overvalued home. His final advice is saved for last: if you're planning on staying more than ten years, buy regardless. Real estate's ultimate value is in being a place to live, not as an "investment". To rework a cliche: Buy to live, don't live to buy.

It's fascinating to see how the media coverage is affecting the reality of the economic situation. This bubble, like all bubbles (from tulips to tech), is due to information inequality. Price inflation occurs due to inaccurate information about demand and future conditions. The first reports of the bubble began to appear in 2002. If the information inequality had suddenly disappeared then, the bubble would have "popped" in a shocking reversion to stability. The measured influx of information, slowly rising in frequency, has allowed gradual change to occur. The most skittish have already left the market, and as more reports appear we will begin to see a gradual "deflation" of the bubble.

There's still danger; sudden external events (like the now-independent value of the yuan) or a large number of people simultaneously reaching their personal risk threshold could precipitate an unstable situation.

Still, it's nice to think that the cassandras may help prevent the very events they predict. The early alarms have allowed gradual change instead of catastrophe. It's like the "Y2K bug": The only reason the Y2K bug didn't cause more problems than it did was due to the alarms raised and effort expended years before.

Cassandra would be pleased.