Haas Newsroom

Will the Bubble Burst?
Academic experts at UC Berkeley’s Haas School of Business
Examine the Fragility of the US and Bay Area Housing Market

September 29, 2005

Contact information:
Ute Frey
Office: 510-642-0342
Cell: 510-301-9184
Email: frey@haas.berkeley.edu

No Bubble for the Bay Area, According to Prof. Davidoff

Is the Bay Area’s housing market in a bubble? Not according to Assistant Professor Thomas Davidoff, who believes that most recent price growth and the geographic distribution of housing price growth can be explained by a combination of falling interest rates, easier mortgage credit, and the geographic distribution of land scarcity. Davidoff's recent research also indicates that California's combination of high income taxes and low effective property tax rates are a poor idea in a state with limited prospects for housing supply growth.

Expert: Thomas Davidoff, Assistant Professor, Haas Real Estate Group

Help is on the Way for Hedging Risk in Real Estate Investing

In the future, real estate investors will be able to protect themselves against risks in real estate investments with derivative contracts, much as call and put option contracts protect against risk in the stock market, thanks to advances in a field called financial engineering. Until such a time, Prof. John O’Brien suggests that one’s house is a hedge against the cost of their future housing requirements. For the owner-occupied home, price changes should not be considered absolute gains or losses in the same way as other investments that may not be directly correlated with any future liability. His views and the resulting discussions are published in his blog at www.financialbulls.blogspot.com.

O'Brien served as the managing director of Credit Suisse Asset Management in New York, after leading roles at Leland O’Brien Rubinstein Assoc., Capital Market Fund, and S&P500 SuperTrust. In 1972, he co-founded O’Brien Associates (later renamed Wilshire Associates) and co-developed the O’Brien 5000 common stock index, later renamed the Wilshire 5000 Index.

Expert: John O'Brien, Adjunct Professor and Executive Director of the Master’s in Financial Engineering (MFE) Program

Will Slowing Real Estate Market Cool of Consumer Spending?

Even if the real estate market slows down, the US economy shouldn’t suffer too much, according to Prof. John Quigley. In a recent study, Quigley and his co-authors found that while consumers spend more when their real estate is going up in value, they don’t reduce their spending at all during times when real estate values are decreasing. Apparently, consumers get locked into a pattern of spending during good times and then find it hard to adjust.

Quigley is an expert on the integration of real estate, mortgage and financial markets; urban labor markets; housing; spatial economics and local public finance. He has served as vice president of the Association for Policy Analysis and Management and as president of the American Real Estate and Urban Economics Association, and has written about the affordability of housing, hedging of housing risk, and homelessness.

John Quigley, I. Donald Terner Distinguished Professor of Business at the Haas School of Business and director of the Berkeley Program on Housing and Urban Policy