Fischer Price Bubbles

Economists do not necessarily agree on the precise definition of an asset bubble or the appropriate policy response (if any), but the views of some economists matter more than others. One economist whose views matter a lot is Stanley Fischer, currently Vice Chair of the Federal Reserve Board of Governors. From 2005 to 2013, Fischer served as Governor of the Bank of Israel (BOI) where he was deeply involved in the central bank’s response to rapidly rising housing prices in that country.

In spring 2013, shortly before the conclusion of his term at the BOI, Fischer reflected on his experience responding to rapidly rising housing prices in Israel during a speech at the International Monetary Fund (IMF). (The speech was recently published as a chapter in the book What Have We Learned: Macroeconomic Policy after the Crisis.) The speech includes a wealth of insight into how Fischer thinks about house price bubbles, as well as his views on the appropriate response of monetary policymakers to asset bubbles.

For instance, he writes:

“I have tried to educate the press, and tell journalists that a bubble is a feature that has a technical definition and that one can test for it. … Nonetheless, the question of whether we are in a process that meets the technical definition of a bubble is not really useful. Rather, the useful question is whether prices are going up too fast. The fact that two years in a row [home] prices rose more than 16 percent each year is an indication that prices were going up too fast,” (p. 92).

In the speech he did not expand upon what is special about the 16 percent threshold or the two-year window. Presumably this threshold would be different for economies with different levels of output and income growth, and it could vary along a range of other macroeconomic and financial dimensions as well. Some economists consider affordability to be a more relevant metric than home value growth.

However, to test Fischer’s rule-of-thumb, we used the Zillow Home Value Index (ZHVI) for 1997 through the present. The ZHVI takes the median home value in the top 500 U.S. metro areas. We looked at U.S. metro areas where home values increased at an annual pace of at least 16 percent for a period of at least 24 months.[1] (Nationwide home value increases do not approach a 16 percent annual rate in the U.S. in our data—the series peaks at 12 percent in November 2005.) For convenience, we label these periods of protracted home value increases as “Fischer Price Bubbles.” The results are below.

Between 1997 and 2007, 74 of the top 500 U.S. metro areas experienced Fischer Bubbles, including twice in Salinas, CA and San Luis Obispo, CA. The longest Fischer Bubbles were in Redding, CA (53 months), Phoenix Lake-Cedar Ridge, CA (52 months), Barnstable Town, MA (47 months), Key West, FL (45 months), Gardnerville Ranchos, NV (45 months) and Eureka-Arcata-Fortuna, CA (45 months). About one-third (27 of 74) were in California metro areas and about one-fifth (16 of 74) were in Florida metro areas.

Between the first month when annual home value appreciation surpassed 16 percent and the last month when it was above 16 percent, home values grew most in Key West, FL (+139 percent), Bakersfield, CA (+118 percent), Fresno, CA (+113 percent), Redding, CA (+113 percent), Hilo, HI (+112 percent) and Madera, CA (+112 percent). The smallest overall gains were in Santa Barbara, CA (+40 percent), Virginia Beach, VA (+45 percent), Homosassa Springs, CA (+47 percent), Baltimore, MD (+48 percent) and Flagstaff, AZ (+48 percent).

The map below shows the metro areas that have experienced Fischer Price Bubbles between 1997 and the present. Colors reflect the length (in months) of the bubble, and the relative sizes of the dots reflect the percent change in home values over the course of the bubble.

No metro areas currently meet the criteria of a Fischer Price Bubble, but the following eight metro areas are approaching that threshold for the number of consecutive months of annual home value increases in excess of 16 percent:

• Las Vegas, NV: 18 months
• Stockton, CA: 17 months
• Modesto, CA: 17 months
• Reno, NV: 17 months
• Fernley, NV: 17 months
• Riverside, CA: 15 months
• Merced, CA: 16 months
• Vallejo, CA: 16 months

Of course, regional asset price bubbles are very different (and pose very different risks) from nationwide bubbles. However, the data above suggest that Fischer’s implied rule may be a useful rule-of-thumb.

[1] We include intervals where the annual pace of home value growth drops below but remains near the 16 percent threshold for two months or less.