Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity—or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.
Recent trends are mixed. Values and sales bottomed in 2009 (charts 1 and 3 below), but vacancies are high (chart 2) and commercial mortgage-backed securities lending, while improving, is still weak (chart 4). “Extend and pretend” is the order of the day at commercial banks, which are digesting $80 billion of losses on commercial real estate loans, and the real challenge is still ahead: $1.6 trillion of commercial real estate loans are coming due in the next eight years.
New-home sales in the U.S. were up 17.5% in December, but 2010 was still the worst year on record for the homebuilding industry. For the entire year, approximately 321,000 new homes were sold—the lowest number since 1963, and 14% below 2009. The December surge is attributed, in part, to a homebuyer tax credit in California.
Economist Robert Shiller argues that a worldwide “social epidemic” of ideas is driving renewed confidence in the economy, just as it drove the crisis of confidence that seems to have bottomed in March:
Economic analysts often turn to indicators like employment, housing starts or retail sales as causes of a recovery, when in fact they are merely symptoms. For a fuller explanation, look beyond the traditional economic links and think of the world economy as driven by social epidemics, contagion of ideas and huge feedback loops that gradually change world views. These social epidemics can travel as swiftly as swine flu: both spread from person to person and can reach every corner of the world in short order.