Tom Keane

Pop!

Why are we such suckers time and again for real estate bubbles? It's simple, really.

For years I greedily tracked the value of my home. A small condo in downtown Boston, it had doubled in value just five years after my wife and I bought it in 1994, according to Zillow.com, the website built for the hard-core real estate voyeur. Two years after that it had tripled. By 2005, just 11 years after the home's purchase, it had nearly quadrupled in value. I was rich! Rich, rich, rich!

Three years later, I'm not so rich. And a few months -- maybe even weeks? -- from now, I expect I may be poorer still. 

What was I thinking? It wasn't as if demand for Boston homes had suddenly shot up. During that time, in fact, the city's population remained relatively flat. Nor did the cost of construction suddenly jump dramatically. And, yes, while we had put some money into the place, the sad fact was that by 2005, the home was looking a bit bedraggled. Yet, for some reason, I happily fell into the delusion that I was set for retirement.

I wasn't alone in this thinking. We were all deluded. In 1999, the median home price in Boston was under $200,000. Six years later (again, according to Zillow.com), it was $444,000. The same happened throughout Massachusetts. In 1999, the median home in the Commonwealth fetched $165,000. In 2005: $377,000.

How ludicrous was this? Worse than you may think. Yale economics professor Robert J. Shiller created an index tracking "real" housing prices for the nation (that is, adjusted for inflation) back to 1890. The index started at 100. Except for the Great Depression and a few other wobbles, for a century the index floated somewhere between 100 and 120. Beginning in 1997, however, the index began to spike upward, shooting from 110 to nearly 200 in nine years. Remember, these are "real," inflation-adjusted values, meaning that somehow the intrinsic worth of housing nearly doubled in less than a decade.

In retrospect, that's absurd. But we believed it (and by "we," I mean almost everyone: buyers, sellers, developers, lenders, investors, tax collectors, government officials, and so on). No more, of course. Now, instead of glorying in a boom market, we're pointing fingers. The Federal Reserve pushed interest rates to historic lows. The deductibility of interest made borrowing cheaper. Lenders lost control of their standards. Buyers lost control of their senses. Government policy encouraging homeownership went overboard. Newfangled mortgage-backed securities obscured risk. Regulators were asleep at the wheel.

Whatever. To me, the troubling question is not the causes of the bubble -- that seems fodder for endless political argument -- but rather why almost all of us blindly bought into it.

Economists don't really understand why bubbles like this occur. The first documented case was in the 1600s in Holland, when a mania for tulips for a time drove the price of some bulbs to more than the annual income of a well-off citizen. There have been bubbles aplenty since: Beanie Babies, Internet stocks, and, of late, oil. There have also been real estate bubbles: one in the 1970s, a second in the 1980s (the latter brought down the revered Bank of New England). It's easy to say we should learn our lesson. But history suggests we don't.

Here's why: Bubbles are a great opportunity to make money. Let's say you had been a skeptic and, even as housing prices started to climb in the late 1990s, you refused to play the game. You might now seem a prophet, but you'd also have missed out. True, right now people are losing money as real estate values drop. But during the years the bubble was inflating, lots of people made lots of money (indeed, even now, housing prices are far above historic norms).

Yes, in the long run, bubbles are crazy. And in the long run, they eventually burst. But in the short run, when everyone else is making money, they're hard to resist. If we expect our homes -- or any other assets that are part of a bubble -- to be worth more tomorrow than they are today, then why not buy, why not borrow? That's why, chastened as we may be by the current collapse of the credit markets, someday soon something new will come along -- a new kind of tulip bulb, perhaps, or just a resurgence of the housing market -- and we'll all merrily plunge right in. It's the rational response to an irrational world.

Originally published in The Boston Globe Magazine, October 26, 2008. Illustration by Emiliano Ponzi.

Our Population Puzzle

White flight doesn't seem to be happening after all. What, if anything, does this say about Boston?

Something funny is happening to Boston's new status as a "majority-minority" city - that is, as a place with more nonwhite residents than white. It might not last long. After the 2000 Census documented a white population that had dropped to 49.5 percent, it seemed inevitable that Boston would follow the path blazed by some other US cities, becoming more dominated by blacks, Hispanics, Asians, and other minorities.

Instead, in what seemed a stunning demographic turn of events, 2006 data from the US Census Bureau showed the percentage of whites in the city had actually increased to an estimated 50.2 percent. So is Boston now "majority-majority" again? Nope. New 2007 data released recently showed that the number of whites in the city had risen by almost 14,000 since 2000, but Boston's population had grown, too, sending the percentage of whites back down to 49.8.

 So what are we to make of all this? One thing's certain: There is no flood of whites from the city. The expectation in 2000 was the shift from a white population to a nonwhite one would continue apace. Clearly, that's not happening. Moreover, a similar reversal is occurring in other US cities. The populations of Atlanta and Washington, D.C., for instance, have for years been largely African-American. Yet new data suggest that, in a few years, blacks in both cities will - numerically - be in a minority. Looking at the data, The Wall Street Journal billed the phenomenon the "end of white flight."

The results of the 2000 Census had provoked much discussion here about white flight, immigration, the future of the city, and political power (e.g., when will Boston finally have a nonwhite mayor?). These latest figures suggest something very different is occurring. But why?

One explanation is that cities have simply become better places in which to live. Since 1993, the hallmark of the Menino administration has been a focus on the nitty-gritty of urban living: better trash collection, cleaner parks, improved schools. Has this attention to quality-of-life issues kept whites from leaving? (Whites generally have higher incomes than blacks and hence have an easier time choosing where they want to live.) Similarly, the dramatic drop in urban crime, in Boston and elsewhere, has made city living remarkably safer. (That's true even now: There are far fewer serious crimes in Boston this year than there were in 2007.) If fear drives people out, wouldn't it be reasonable to assume its absence might bring them in?

Alternatively, perhaps we're seeing a shift in culture and sensibility. Bored suburbanites - especially empty nesters and the younger crowd - increasingly see cities as adult playgrounds, chock-full of restaurants, theaters, and nightclubs. They leave their McMansions and move in, a phenomenon some academics call "demographic inversion" (which is really just a fancy name for gentrification writ large). There are worrisome downsides to this. As wealthy whites move in, prices go up and poorer minorities can be forced out. There's concern that the influx of whites into cities might portend the decline of historically minority institutions such as black churches. There's also fear that black and other minority populations pushed out of cities would become diff use and lose the political power they had gained in urban areas.

I think both of these explanations - safety and fun - have merit. Boston today is a more hospitable and far less intimidating place than it once was. It is also an exciting place, filled with opportunities for people with large disposable incomes to spend their money.

Still, Tom Menino didn't invent the notion of clean streets or crime control. And cities have always been more hip than suburbs. Something else is at play, and it may have to do with the racial antagonism that was behind the largely segregated housing patterns that for so long defined American life. Many have speculated that racism - while certainly still with us - is, at long last, losing its power. They point to Barack Obama's candidacy as proof. Perhaps proof can also be seen in the apparent willingness of whites to move back into cities. Without question, these demographic changes will pose real challenges over the next few years. Still, any lessening of racial and ethnic segregation ultimately has to be seen as a good thing. Maybe we really are learning to get along.

Originally published in The Boston Globe Magazine, October 12, 2008. Illustration by Michelle Thompson.