Charles Mudede

The Seattle Times business writer Mike Rosenberg entirely attributes our city's "real-estate surge" (we cannot call it a bubble because in standard economics, there are no such things as bubbles—revisit the pre-2009 economic literature for more about this astounding lacuna) to "a historic shortage of homes for sale, and strong job and population growth ratcheting up demand." The business reporter refers to the recent cooling of the rental market as evidence. After a sharp and prolonged increase in supply, rents in the city are finally not rising as fast as they used to. This is good news for renters, though "the average two-bedroom apartment in the city topped $2,000 a month for the first time."

What's interesting in this vision of the crisis (and here I use the word "vision" in exactly the way it was understood by the early-20th century economist Joseph Schumpeter) is not so much how its formulated but the solution it implies. The solution is almost wholly found in the market, whose growth has been restrained. As a consequence, humble homebuyers have been forced to become ugly and "fight it out through bidding wars." So, what we are to believe is that if the restraints on growth are removed, home prices will naturally fall and the fighting cease. Peace will rule our real estate market. Rosenberg points to the suburbs to connect his vision (which was shaped by the impeccable logic of standard economics) to a concrete observation.

It is interesting, however, that the policy prescriptions that result from this vision all involve the market. There is no outside in this Seattle Times article. There is only an inside. And the key inside assumption is that prices communicate an equilibrium that has adjusted to the material conditions of the market. This is why there can't be a bubble in the vision presented by business reporters like Rosenberg. A bubble (or even flipping) implies that prices and the fixed laws of exchange have been delinked. This means other, unknown, and maybe unknowable forces are at work. We must stick to price surges and price falls that respond to (and communicate) standard exchange inputs. My point is that this vision also dominated the way the housing market in Vancouver, British Columbia, was reported until it was too late.