Q&a -- Dean Baker

The Man Who Told Us So

Think tank economist foresaw the housing meltdown and its financial fallout in 2002, sold his condo and moved into a rental. He doesn't expect the party to start again soon

May 18, 2008|By Jamie Smith Hopkins | Jamie Smith Hopkins,Sun reporter

Back when quickly rising home prices struck many as a good thing, economist Dean Baker was a veritable wet blanket.

In August 2002, he published a paper suggesting that the country was caught in a housing bubble, that a price slump was inevitable and that there could be a huge loss of equity, "a surge in mortgage default rates" and "serious stress on the financial system." He was so convinced, he sold his condo in 2004 to become a renter.

That all seems prescient now.

Baker, co-director of the Center for Economic and Policy Research, a think tank in Washington, doesn't claim to be more far-seeing than the droves of experts and economists who at least initially took a "don't worry" stance. He thinks people weren't paying enough heed to history, which showed that home prices tend to rise in step with the overall increase in the cost of living.

Baker, 49, lives in Washington with his wife, Helene Jorgensen. He spoke to The Sun recently about housing, his former home and where he thinks the market is headed. What made you start worrying about the housing market?

When you suddenly see this big run-up in house prices without any historical precedent, that in itself should be cause for concern. I went to what other economists were saying to try to explain it, and none of it really made any sense, things like population growth and income growth. ... After the recession, income growth was very weak, so that couldn't explain much, and population growth - we already had the baby-boom cohort owning homes. On the supply side, we were actually building homes at a pretty rapid pace. ... All you're really left with is a bubble as the explanation for why prices were rising. There's certainly precedent for that: Think of Japan, where you had a stock bubble and a housing bubble.

I came to believe that was probably the case in the U.S. Rents were not rising particularly rapidly, also suggesting this wasn't fundamentals in the housing market, because if this was something fundamental pushing up sales and prices, ... you'd expect to see some comparable run-up in rents. Was there a defining, lightbulb moment for you?

It was [then-Federal Reserve Chairman Alan M.] Greenspan that got me thinking about it. He gave testimony in the summer of '02 before Congress. ... He talked about the increase in housing prices, which was already evident at that point, ... and he gave explanations as to why it was not a bubble. And nothing he said made any sense. That was when I really started to look at this closely.

I debated a lot of people on the issue. ... They'd make these broad statements - "housing is always a good investment," "house prices don't fall." That's not really much of an argument. Did you feel like a lone voice?

Pretty much a lone voice, particularly the first year. You put your theories in action when you sold your home.

It was kind of a fluke-ish event. We had bought a condo in D.C. at the end of '96. It had almost tripled in price, and we were sitting there thinking, "It's very likely to fall." We sold in May 2004 and moved a few blocks over, renting a unit very similar to the one we sold. ... In fairness, it wasn't just a financial decision. If we'd really been in love with the apartment ... but we'd been there for seven years. There were a few things that made it less than perfect in our minds, so it made it easier to move, in that way. Given the fact that we were moving, there was no doubt in our mind that we wanted to rent, not own, at that point. Did you have to convince your wife?

She's also an economist - we're an exciting couple. She was totally supportive of the idea. We were kind of talking about it, and we both agreed it was a good thing to do. There was no arm-twisting on my part. Are you still renting now?

Yep. We're waiting. Have you ever regretted that decision?

We like our current place. No, we're pretty satisfied with the move. We're pretty confident - prices have already come down, and I don't doubt they'll come down quite a bit more. Could the bubble - and thus the slump - have been avoided?

Oh, you could have avoided the bubble. I think it was a combination of greed and disastrous policies. I blame Greenspan. I think it's the Fed's responsibility to avoid asset bubbles like that. There are a variety of things he could have, should have done. First and foremost, just talking about it. ... Warning people about the bubble, saying, "We've got a really big problem here." ...

People are talking about this being 20-20 hindsight. No, this is stuff I knew at the time, other people knew at the time. Subprime [lending] has been around for a while, and it suddenly jumps from being 9 percent of the market in '02 to being [nearly] 25 percent of the market in [2006]. If you knew nothing else, that's all you knew, that should have set off all sort of alarm bells. How bad do you think the downturn will be when all is said and done?

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