It’s now taken for granted that stories both true and false, often propagated by social media, have the power to influence everything from the outcomes of TV talent competitions to presidential elections. Oddly, though, the role of stories in changing the course of the global economy has not generally been acknowledged. Until now. In Narrative Economics: How Stories Go Viral and Drive Major Economic Events,* Nobel Prize-winning economist Robert Shiller considers how stories shape the timing and impact of ideas ranging from the gold standard to automation by revisiting the media. Arguably more important, the author of Irrational Exuberance looks back at events shaped by public overconfidence or panic, where economists have had little insight into precipitating factors that have great influence over economic history. In the chapter of Narrative Economics excerpted here, Shiller analyzes how public attitudes toward the residential real estate market have changed and begins to build a discipline that may prove as important as behavioral economics.
— Peter Passell
Copyright 2019 by Princeton University Press. All rights reserved.
Illustrations by kathryn rose brown
Published October 28, 2019
Real estate narratives — stories about the often-tantalizing increase in the value of land, housing, locations and homes – are among the most prominent economic narratives.
A recent reminder of their influence was the talk leading up to the Great Recession of 2007-9, which disrupted economies all over the world. This recession was fueled by stories communicating inflated ideas of the value of housing.
Real estate narratives have a long history. From ancient times through the Industrial Revolution, real estate talk centered on the price of farms. In modern times, attention shifted first to stories about empty city property suitable for building homes, then to actual homes in metropolitan areas. These shifts are just mutations of a perennial narrative about the scarcity of land and its value.
We might think that the real estate boom-and-bust narratives would be part of the same constellation of panic or confidence narratives discussed in a previous chapter on business confidence. But real estate confidence is very different from confidence in the state of the economy because people tend to view the two as very different things. Real estate is regarded as a personal asset, which one might have useful opinions about, while the economy is seen as the product of myriad forces. As this chapter reveals, however, real estate is also a socially informed asset, with its value depending on how people compare themselves to their neighbors and beyond.
Speculation and Land Bubbles
For much of history before the 20th century, popular narratives celebrated land speculation (either of farmland or of vacant city lots in burgeoning or promised cities) rather than home speculation or stock speculation. The following land speculator’s narrative, full of human interest, was written in 1840 after the collapse of a U.S. land bubble that had started in 1837:
His father left him a fine farm free of incumbrance [sic]; but speculation became rife, fortunes were made in a twinkling, and D. fancied “one thing could be done as well as another.” So he sold his farm, and bought wild lands in the prairies and corner lots in lithographed cities; and began to dream of wealth worthy of “golden Ind.” Work he could not: it had suddenly become degrading. Who could think of tilling or being contented with a hundred acres of land, when thousands of acres in the broad west were waiting for occupants or owners? D. was not the man to do it, and he operated to the extent of his means. At last the land bubble broke; lithographed cities were discovered to be mere bogs; and prairie farms, though the basis of exhaustless wealth, worthless unless rendered productive by labor.
Here we see a perennial narrative of a foolish speculator buying unseen land in a bog, a narrative resurrected in the 1920s Florida land bubble.
The Florida Land Boom of the 1920s
There appears to have been little talk of single-family homes as speculative investments until the second half of the 20th century. A ProQuest News & Newspapers search for “home price” reveals virtually no reference to the term in a speculative context until then. In fact, the phrase had a different meaning in past centuries — as in the “home price of wheat,” meaning the price of wheat in the domestic market as opposed to in foreign markets. When the phrase with its modern meaning was mentioned, it typically appeared in a story about a rich person spending a lot on a home as a sign of wealth, but with no sense that the home was appreciating in value.
For example, an 1889 article in the St. Louis Post-Dispatch exclaimed:
Senator Sawyer, who has for years lived in the house which Jefferson Davis occupied when he was here in Washington, has stopped paying rent and has built a MAGNIFICENT BROWN STONE MANSION within a stone’s throw of Dupont Circle. It is worth at least $80,000 and Sawyer’s millions will keep it in fine style. There are fine houses all around it.
There is reference to value as if it is unchanging, but no sense that the senator might be making a speculative investment.
A ProQuest News & Newspapers search for “price per acre” shows a very different pattern. The phrase peaked at the beginning of the 20th century, when it tended to refer to farmland as a speculative investment. The Florida land boom of the mid-1920s gets many hits, but the phrase home price almost never appears in those articles.
During that widely discussed boom, an associated narrative emphasized that the proliferation of motorcars was making Florida land more easily accessible to northerners looking for winter homes. Given the rise of the automobile, it is not surprising that the allegedly beautiful sites that were selling out so fast were empty lots for building new homes. However, by 1926, the Florida land boom had become a widely covered scandal, reported nationally. Newspapers printed stories that promoters were selling undeveloped land divided into home-size parcels, sight unseen to Northerners who would never in their lifetimes see a town built near their isolated homes. These stories rendered such sales of undeveloped land disreputable.
Land has always been only a small part of a home’s value. One estimate, by Morris A. Davis and Jonathan Heathcote, suggests that the land’s value averaged only 36 percent of the home’s total value from 1976 to 2006. We do not seem to have data on the percentage of land value in home value for earlier years, except in assessments for property tax. But presumably when the U.S. population was more rural, the percentage was even lower.
In contrast to the Florida narrative with its emphasis on land, investments in homes historically have been viewed as investments in structures that depreciate through weather and use, that require constant maintenance, and that go out of style and get torn down eventually. We can understand why land itself with no structure on it, at least during the Florida boom, seemed a more exciting investment.
Traditionally, prices of new homes were widely thought to be dominated by construction costs. In fact, it used to be conventional wisdom that home prices closely tracked construction costs. A 1956 National Bureau of Economic Research study noted some short-term movements in U.S. home prices not explained by construction costs between 1890 and 1934, but it concluded:
With regard to long-term movements, however, the construction cost index conforms closely to the price index, corrected for depreciation. .… For long-term analysis the margin of error involved in using the cost index as an approximation of a price index cannot be great.
Because their construction cost index included only wages and the price of materials, but not the price of land, the NBER analysts were viewing investments in homes as nothing more than holdings of depreciating structures, wearing out through time and tending to go out of fashion. With such a narrative, housing bubbles have little chance of getting started.
Enter News, Numbers and Narratives
Newspapers eventually discovered that readers were interested in stories about home prices in congested inner cities, where the price of land is more connected with home prices because land is much more expensive there. These stories may have gained contagion, leading people to think that their properties far from city centers shared some of the same speculative trend to higher prices.
Another factor adding to contagion was the development of home price indexes for existing homes. The first mention of median prices of existing homes in ProQuest News & Newspapers appeared in 1957 in an Associated Press story referring to a U.S. Senate housing subcommittee report, which concluded that low-income families were being priced out of the housing market partly because of the increased price of land.
Newspapers began publishing the National Association of Realtors median price of existing homes in 1974. The Case-Shiller home price index (now the S&P/CoreLogic/Case-Shiller home price index), originally created by Karl Case and me, first appeared in 1991. These indexes allowed news media to regularly announce large movements, thereby lending concreteness to stories about trends in home prices.
Before the advent of statistical measures of home prices, it was relatively hard for the media to come up with regular stories about speculative movements in housing. By contrast, before stock price indexes became popular in the 1930s, journalists were able to quote numbers illustrating big movements in the stock market, usually by citing one-day changes in a few major stocks, which tended to move in the same direction on big move days. They lost no opportunity to write such stories.
But it is not so ven changes in the median home price month to month were not newsworthy because one-month changes could be erratic when different kinds of houses sold from one month to the next. The repeat-sales that Karl Case and I published marked the beginning of a new era, one in which month-to-month changes in aggregate home prices could be inferred from highly disparate houses, each of which sells very infrequently. easy to write about news in home prices. A house is almost never resold in just one day. Rather, most house sales occur over long intervals, years or decades.
Even changes in the median home price month to month were not newsworthy because one-month changes could be erratic when different kinds of houses sold from one month to the next. The repeat-sales that Karl Case and I published marked the beginning of a new era, one in which month-to-month changes in aggregate home prices could be inferred from highly disparate houses, each of which sells very infrequently.
The indexes led to a futures market for single-family homes at the Chicago Mercantile Exchange that has the potential to reveal day-to-day changes in home prices. Activity on that market mostly dried up, though, after the 2007-9 financial crisis.
A common assumption in accounts of speculative bubbles in stock and housing markets has been that investors are extrapolating recently successful investment performance, expecting the price increases to continue and thereby forcing prices up even higher. This process repeats again and again in what may be called a vicious circle or feedback loop. However, narratives matter as well.
If we listen to the narrative at such times, investors may seem a lot less calculating than they sometimes appear. Instead, the price increase appears to be driven less by future expectations than by the proliferation of stories and talk that draws attention to the asset that is booming, thereby fueling the bubble.
House Lust and Social Comparison
It is vital to listen to what people are saying during a rapid rise in prices to understand just what is animating them. In his 2007 book House Lust: America’s Obsession with Our Homes, Daniel McGinn sees psychological factors at work. The book was published at the beginning of the financial crisis, right on the heels of the most rapid increase in house prices during the record-setting U.S. home-price boom of 1997-2006.
McGinn chose the title “House Lust” because he believed that the emotions displayed in conversations during the boom market just before the financial crisis and recession reflected a true lust: a lust for status and maybe power that sometimes drives people to ruinous actions. During this lustful period in U.S. history, people relished stories of rising home prices (and of the people who benefited from them) a bit too much to be rational.
He defines and explains some impulses and motives that are not in most economists’ vocabulary. And he describes the “high-five effect,” which is the “vicarious thrill of cheering on a winner.”
McGinn also outlines an “our house is our retirement plan” effect: the story that a house is necessary to successful living because it is a recognizable store of value. The narrative in the recent boom-fueled house prices by implying the dictum that one should “stretch” or “reach” to buy a house. Buy the biggest house you can afford, because you will be glad that you did when the house’s value goes even higher.
Note, too, what McGinn refers to as the “it’s so easy to peek in the window” effect, caused by the internet and social media, that allows housing voyeurs to get information about neighbors’ and celebrities’ home specs and prices as never before. And in many neighborhoods, if you’d judged the nation’s interests by its backyard barbecue conversation — settings where subjects like war, death and politics are risky conversational gambits — a lot of people find homes to be more compelling than any geopolitical struggle.
The internet adds force to the narrative in today’s housing market. People are naturally curious about the amount of money that others make in their jobs, but they can’t find such information online (except in the case of government jobs), and it is considered vulgar to ask. However, McGinn notes, websites such as Zillow and Trulia, both founded in 2006, allow you to find out right away (for free) what anyone’s house is worth.
Social psychologist Leon Festinger described a “social comparison process” as a human universal. People everywhere compare themselves with others of similar social rank, paying much less attention to those who are either far above them or far below them on the social ladder. They want a big house so that they can look like a member of the successful crowd that they see regularly. They stretch when they pick the size of their house because they know the narrative that others are stretching.
McGinn’s “you are where you live” effect confirms the power of the real estate comparison narrative. As of the early 2000s, when the housing boom was at its peak, there was no other comparable success measure that one could just look up on the internet.
The History of Homeownership Promotion
In another element of the real estate narrative, history shows a succession of advertising promotions for homeownership itself, not just for the sale of individual properties. In the United States, these promotions began with the Own Your Own Home campaign, launched by real estate agent Hill Ferguson in 1914 under the auspices of the National Association of Real Estate Boards (precursor to the National Association of Realtors today). The Own Your Own Home campaign, like the savings and loan association movement that preceded it in the United States and the even earlier building society movement in the U.K. and Europe, was an attempt to help people build up some savings.
The Own Your Own Home campaign set out to change the widespread presumptions that borrowing is disreputable or dangerous, that people should never go into debt and that they should accumulate savings to buy a home with an all-cash offer. In a 1919 display ad placed in numerous newspapers, the campaign stated:
Don’t let the idea of a mortgage scare you. Some people think they’re a disgrace. But if they’re good enough for the biggest corporations and the United States government they needn’t frighten you.
Note that the purchase of a home was not cast as part of the more modern concept of “saving for retirement.” A ProQuest News & Newspapers search reveals that retirement was virtually never mentioned in advertisements for homes until the 1920s, and the idea did not take off until the 1940s. In the earliest part of the 20th century, people didn’t think of saving for retirement, as they in many cases did not think they would live long enough to spend much time in retirement. Rather, savings were put aside as a safety measure against illness or other misfortune.
The savings bank movement and the Own Your Own Home movement were a moderate success. The homeownership rate rose, and even today, low-income people in the United States and other advanced countries tend to have some savings in the form of home equity.
Next came the Better Homes in America movement launched in 1922 by Marie Meloney, the editor of a woman’s magazine, The Delineator. Real estate groups continued to pay for advertisements advocating homeownership throughout the rest of the 20th century. In the years leading up to the 2007-9 financial crisis, the National Association of Realtors placed numerous ads including the words “Now is a good time to buy or sell a home.” After the financial crisis, it launched a new campaign, “Home Ownership Matters.” These campaigns emphasized that homeowners tend to be successful and patriotic people. The campaigns not only helped support patriotic ideals but also created a clearer rationale for buying a home, thus enhancing the narrative.
The desire to impress the neighbors is part of the social fabric, but it comes with a psychic cost. Marketing people often find themselves in the position of trying to help potential customers get past their guilt about showing off, which may involve buying land or ostentatious houses. Before the Great Depression, many ads touted purchasing undeveloped land as investments. For example, a large newspaper display ad from 1900 with the headline “A Princely Spot Is Orangewood” offered five-acre plots near Phoenix, Ariz., that could be used either to build a home or to plant an orange grove. The ad featured recent auction prices of oranges from the region as well as text about how fashionable the area was.
In response to complaints about such marketing, individual states put a series of “blue sky laws” in place over the 1911-33 period. These prohibited, in the words of a 1917 Supreme Court ruling, the selling of “speculative schemes which have no more basis than so many feet of ‘blue sky.’”
Mr. Ponzi and his Other Scheme
In 1926, Charles Ponzi, who is said to have invented the Ponzi scheme in 1920, was released from jail. (Also called a “circulation scheme,” a Ponzi scheme is a fraudulent investment fund that pays off early investors with money raised from later investors, creating a false impression of profits to lure yet more victims.) Soon thereafter, Ponzi went back to jail for violating Florida’s blue sky law. During the Florida land boom, he began selling small parcels of Florida land to investors without disclosing that the land was under water. Ponzi’s name, and the story of unwitting investors buying land in a swamp, went viral with his circulation scheme. And it remains famous even today, but his name is not so attached to the swamp narrative.
In reaction to such abuses, the states imposed stronger laws on the subdivision of land for sale to small investors. State laws defined a land sale as a securities sale even if a sale was a simple transfer of property, thus making all sales subject to securities regulation. In addition, regulation of the sale of land was reinforced to prevent such abuses.
As a result of the scandals and the ensuing legislation, people began to think that investing in undeveloped land based on prospective future use was irresponsible and disreputable — that land needed to generate real income before reputable brokers could sell it. Thus advertising turned to offering investments in ongoing businesses and owner-occupied homes, which continued to feed the real estate narrative.
As people continued to think of home purchases as investments in land rather than reproducible and depreciating structures, the potential for home price bubbles persisted. At the same time, real estate investment remained the simplest of speculative investments. Most people never find the time to get involved in a risky specialized investment. But many people own a home at some point in their lives, and so they typically do not have to work hard to learn about real estate as a speculative investment.
City Land and Stories
Changing narratives do not explain major swings in home prices afflicting some cities and sparing others. There is evidence that mixed outcomes can be explained merely in terms of supply constraints. For example, undeveloped land for building is more available in some cities than in others, and there could be a time when a city that once had plenty of land for building finds that it has been exhausted.
When population is expanding, even if a city is not particularly attractive and has no especially favorable narratives, there will be some people who want to move there. For example, there are always potential immigrants, often from poor or unstable countries, seeking a foothold in advanced countries. And they may choose cities based on arbitrary factors such as proximity to home country or the existence of a sub-population speaking their language.
If land is readily available for purchase there, new houses will be built, and the immigrants’ demand for housing may have minimal impact on prices. But if such land has run out, these immigrants will have to outbid others for existing houses, and prices will rise. In that case, only the wealthier home-seekers will be able to live there. People who are already living in the city but have no special interest in it have an incentive to sell their houses and take the proceeds to another more affordable city. The supply constraint thus results in higher prices and a wealthier population.
Supply constraints also help to explain the differences in home prices across cities and through time. MIT economist Albert Saiz used satellite data to estimate the amount of available land around major U.S. cities. He found that cities that are boxed in by water or steep-sloped terrain (which is less suitable for building) tend to have higher home prices. There is also a tendency for people who already own homes in a city to try to block further construction, particularly of lower-cost housing. They have an economic incentive to do so, for limiting housing supply boosts home prices.
The effects of such an incentive may differ across cities. But beyond such conventional economic explanations, there is also evidence that changing narratives play a role in housing booms.
The years leading up to the 2007-9 crisis saw record-breaking increases in home prices in some countries, notably the United States. According to the S&P/CoreLogic/Case-Shiller index, home prices in the United States nationwide rose 75 percent in inflation-adjusted terms between 1997 and 2005, while the Rent of Primary Residence index, corrected for overall price changes, rose only 8 percent. This boom in home prices far exceeded anything that could be attributed to increased unmet demand for housing services.
Indeed, the boom in the United States and other countries was a major factor in the financial crisis. Home prices fell dramatically and defaults on mortgage payments surged, plunging mortgage lenders into serious financial difficulty; the crisis subsequently spread to the rest of the financial sector and the world. By 2012, real U.S. home prices had fallen to a level that was only 12 percent above that of 1997, before taking off again in a new boom that continues today — though this latest boom shows some signs of weakening. Real home prices in the U.S. were up again 35 percent from 2012 to 2018, while real rents were up only 13 percent.
The Rise of Flipping
In trying to understand the housing boom leading up to the Great Recession, looking at the usual suspects — interest rates, tax rates, personal income — is not very helpful. Instead we should examine the shift to a more speculative narrative in which people thought of their homes more as speculative investments in land — a narrative that lenders welcomed.
A new meaning for the word “flipper” went viral in the United States in the 1970s and 1980s. At that time, a flipper was a sharp operator who buys a speculative investment and then “flips” it, selling less than a year after purchase to make a quick profit. The term then became popular during a different kind of housing boom: a condominium conversion boom. Owing to the very high inflation at that time, the tax advantages of homeownership over renting significantly increased because one could deduct the interest paid on a mortgage (very high because of the inflation) from gross income but could not deduct rent paid. Though high nominal mortgage interest rates deterred some from homeownership, for many others the expected appreciation in home value due to inflation offset the high interest rate.
To meet the demand, developers began buying apartment buildings, evicting the renters of the individual apartments and selling the units as condominiums. Renters, some of whom had lived in their apartments for many years, complained bitterly. To assuage them, the operators often offered renters a contract to buy their own apartments at a discounted price at the time of conversion. The agreements allowed them to resell the contract to people interested in buying it. Many renters chose to “flip” their contracts to speculators, who in turn flipped the contracts again. Flippers attracted a lot of attention, and many admired them as entrepreneurs who saw the opportunity quickly enough to cash in on it.
By the 1990s, the term flipper was commonly used to describe people who bought shares in initial public offerings of stock (IPOs) and resold them quickly. People often described the flippers in admiring terms, as people wise enough to understand that IPOs were typically underpriced on the offering date. When the share prices popped up soon after the IPOs, the flippers made quick profits. A famous 1991 article by Jay Ritter showed that the initial IPO price pop tended to be followed by weak performance over subsequent years, so the optimal strategy appeared to be to buy IPOs at the offering and then flip them.
Then, in the early 2000s, during the enormous home price boom, the term flipper became attached to people who bought homes, fixed them up a little or a lot and sold them quickly. Once again admiring stories were told of their successes. While most people were not enthusiastic enough to actually flip houses, they may have imagined that they were engaged in “long-term flipping” simply by purchasing a primary residence as a long-term investment. Thus they engaged the speculation narrative.
Mansions and Modesty
Exuberant real estate narratives did not stop with the financial crisis. In October 2012, The Wall Street Journal launched a new section in the newspaper. Called Mansion, it was a response to a section in the Financial Times titled How to Spend It, but Mansion focused on housing. Notably, 2012 was the same year that home prices in the United States started rising sharply again. It was also the year in which the police finally cleared the Occupy Wall Street movement from Zuccotti Park in New York City, which had started in 2011. The movement had been attracting much attention with the slogan “We Are the 99 Percent,” referring to the majority of the population lacking the means to live extravagantly, in a public assertion that these people matter.
The Mansion section seemed to scream that the top 1 percent mattered even more. It featured lush photo spreads of lavish homes and their pretentious occupants in a tone of gushing admiration. But the section also reported on anxieties about ostentation and about fears of public disgust at such extravagance. For example, a 2017 article in Mansion, “Hotshot Tech Founders Face a Dilemma: Lie Low or Live Large?,” discussed in detail the quandary that heads of technology companies face in deciding how big a home to buy. The article made clear that the choice of a home is part of a delicate balancing of forces in a career-optimization strategy. Hence the line, “Bay Area real-estate agents say their clients are becoming reluctant to buy fancy homes, for fear of spooking investors wary of distracted or high-living founders.”
The Donald Trump Narrative and Urban Investors
Offsetting the modesty narrative was the Donald Trump narrative, which led to his election as president of the United States in 2016. The Trump narrative proved that many people are not at all spooked by those who live large. On the contrary, as Trump openly states in his various co-authored books, it pays to let people know that one is rich. Here the housing boom narrative is co-epidemic with the conspicuous consumption narrative discussed in another chapter. Vast numbers of people have been enamored with the Trump narrative, which encourages the idea that the display of wealth is an amazing, affirmative career strategy — and the polar opposite of Occupy Wall Street idealism. The Trump narrative epidemic contributed to the upward turn in home prices in the United States starting after 2012.
In 2005, during the housing boom that preceded the financial crisis, internet searches for “housing bubble” increased dramatically. The trajectory resembles the Ebola epidemic curve: Something very contagious was clearly happening. Some tried to capitalize on the boom, not just by flipping homes but also by promoting the boom. Enthusiasm for real estate investments infected a significant portion of the population.
In 2005, Trump founded a school, Trump University, saying, “I can turn anyone into a successful real estate investor, including you.” Trump’s timing was bad — The Economist ran a cover story on June 18 of that year about the prospect of a bursting housing bubble. Trump University went out of business in 2010, amidst cries of fraud and deceit.
The Housing Market Today
Since 2003, I have collaborated with my late colleague Karl Case and now with Anne Kinsella Thompson in an annual survey of recent homebuyers in four U.S. cities, conducted under the auspices of the Yale School of Management. One of our questions:
In deciding to buy your property, did you think of the purchase as an investment?
1. Not at all
2. In part
3. It was a major consideration
The percentage who answered, “It was a major consideration” peaked at 49 percent in 2004, falling to 32 percent in 2010 and rising again to 42 percent in 2016.
The survey also asks about the general level of conversation about the housing market. Specifically:
In conversations with friends and associates over the last few months, conditions in the housing market were discussed:
The percentage who answered “Frequently” reached a high of 43 percent in 2005, the end of the 1997-2005 boom. By 2012, the percentage choosing “Frequently” bottomed at 28 percent. The likely interpretation is that the contagion rate for housing market narratives had decreased, and that, indeed, the decline in home prices could be viewed as the end of an epidemic.
What were the narratives in spring 2005? ProQuest found 246 stories with the phrase “housing bubble” from March to May 2005, before the cover stories in The Economist and other outlets. One of these stories included a statement from Alan Greenspan, who said that he saw a little “froth” and an “unsustainable underlying pattern” in the housing market. This statement was then compared with his “irrational exuberance” speech about the stock market in December 1996. Between 2005 and 2007, there were 169 news stories with both “Greenspan” and “froth” in them. It was a colorful, quotable story featuring an economic celebrity. It contributed to a colorful and quotable constellation of narratives, among them narratives with the power to change economic behavior and to bring on a financial crisis.