What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets

By Karl E. Case, Robert J. Shiller and Anne Thompson

Between the end of World War II and the year 2000, the U.S. housing market contributed much to the strength of the macro economy. It was a major source of jobs, produced consistently rising home equity, and served as perhaps the most significant channel to the real economy for monetary policy.

But starting with a drop in the S&P/Case–Shiller index for Boston in September of 2005 house prices began to fall in city after city. By the time it was over, home prices were down as much as 32% on a national basis, with many cities down by more than 50 percent, wiping nearly $7 trillion in equity off of the household balance sheet.

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The Narrative Structure of Global Weakening

NEW HAVEN – Recent indications of a weakening global economy have led many people to wonder how pervasive poor economic performance will be in the coming years. Are we facing a long global slump, or possibly even a depression?

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‘Framing’ Prevents Needed Stimulus

WHY have so many teachers, police officers, firefighters and other public workers been laid off since the financial crisis hit — and why are so few being offered new jobs now?

From July 2008 to July 2012, the number of state and local employees nationwide fell by 715,000, according to the Bureau of Labor Statistics. The reality is actually worse than that figure suggests. The total ended up 1.31 million people below where it would have been had public sector employment simply kept pace with population growth.

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Free Webinar August 30

From CFO Insight:

In light of recent developments in Europe and the rest of the world, financial markets are often seen as destructive economic forces and unproductive parasites to industrious mankind. Furthermore, they are often labelled diametric opposites to the good society. Yet finance can also be a key driver in societal progress. Financial innovation can promote the public good and help societies achieve wider goals. Hence, finance and the good society have a complex and often opaque relationship to each other.

During this webinar, Robert J. Shiller will present the central arguments of his latest book and discuss with participants the role of finance in society. Are finance and the good society irreconcilable, as public debate seems to suggest? Or are they perhaps inseparable, since finance is essential for many parts of society to progress?

Learn more and register

Taxes Needn’t Discourage Philanthropy

HOW high can taxes go? In 1944, the federal personal income tax rate reached 94 percent.

You might expect that such a high rate would lead to economic disaster or class warfare — or both. But it didn’t. Despite it, people prospered back then, and at least in some respects, American society was harmonious.

World War II was raging, and perhaps because of it, people seemed to be more giving, while the government more actively encouraged altruistic acts. There are important lessons to be learned from that time.

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Bubbles without Markets

A speculative bubble is a social epidemic whose contagion is mediated by price movements. News of price increase enriches the early investors, creating word-of-mouth stories about their successes, which stir envy and interest. The excitement then lures more and more people into the market, which causes prices to increase further, attracting yet more people and fueling “new era” stories, and so on, in successive feedback loops as the bubble grows. After the bubble bursts, the same contagion fuels a precipitous collapse, as falling prices cause more and more people to exit the market, and to magnify negative stories about the economy.

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Reviving Real Estate Requires Collective Action

IMAGINE that you are watching an outdoor theater production while sitting on the grass. You have difficulty seeing, so you prop yourself up on your knees. Soon everyone behind you does the same. Eventually, most people are kneeling or standing, yet they are less comfortable than they were before and have no better view. Everyone should sit down, and everyone knows it, but no one does.

This is a collective action problem, a phenomenon that is, unfortunately, all too common. At the moment, the trouble in our real estate markets and the drag these markets are placing on our entire economy may be understood as a collective action problem. In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners — that is, let everyone sit down and relax — but the different stakeholders have been unable to reach an agreement, even if it is in their common interest.

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