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The following article appeared in Left Business Observer #111, August 2005. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.

Frothing at the house

Suddenly the housing bubble is everywhere. The chart nearby is proof—though July saw a cooling from May and June's ecstasy of discovery.

This puts the financial psychologist in a tough situation. Clever traders like to think of the mob as wrong (and of themselves as never part of the mob). So it's tempting to conclude that there can't possibly be a housing bubble because so many people think there is one. But then there's the model of the Recession Index, an idea that LBO stole from The Economist—a count of articles in major newspapers including the word "recession." It's often an accurate and timely measure of when one is beginning and ending. The housing bubble began a while ago, but that so many people are now recognizing it suggests that the affliction may be entering its terminal phase. Talking obsessively about the bubble might be a way of warding off talking about its unpleasant aftermath.

The bubble, and the easy money that's financed it, has been crucial to the economic recovery since 2001. By one measure (that of Asha Bangalore of Northern Trust), housing has contributed over 40% of the cycle's employment growth. Building and remodeling are contributing a near-record share of GDP. Real estate has accounted for 70% of the increase in household wealth over the same period.

Oddly, the official culture celebrates when housing gets more expensive; it's supposed to be the sign of a healthy economy, even though it makes it harder to afford one of