The California Real Estate Bubble: All ARMs

An interesting new paper tries to figure out causality and proportionality in looking at the various causes of wildly increasing prices in California real estate:

The median price of an existing, single family detached home in the state jumped from $241,350 in 2001 to $524,020 in 2005. Meanwhile, home purchases using adjustable-rate mortgages (ARMs) for financing nearly quadrupled (from approximately 20% to 80%).

The conclusion? Controlling for causality, size of effect, etc., and considering population growth, momentum, and the like, adjustable-rate mortgages usage were far and away the biggest factor:


  1. You dropped an important digit in your post. Median home price in CA in 2001 was not $41,350. You probably meant $241,350.

  2. Yup, fixed now. Error was in original, strangely enough.

  3. Given the above info, if you calculate that under normal times prices would have risen five percent a year, instead of $524K, a median house in 2006 should be just over $307K. Meaning when ARMs reset and homeowners are forced to either pay up or move out price should fall by some forty percent. Ouch!

  4. Philip Guziec says:

    “An interesting new paper”
    Can you give us a link to the complete text of the paper? I’d love to read it.

  5. Paul – where can I find the research paper?

  6. Could you be kind to post the link to the original paper? I’m very interested in reading it. Thank you very much.

  7. Please post the link to the original paper. Thanks!

  8. I believe this is the paper Paul is referring to:
    I’ve been waiting for someone to say this. While the media breathlessly talked about how new mortgages were making things easier for people, the reality was the opposite.
    One way to think of this is currency inflation. If you start printing more currency (ask Latin America) prices go up.
    The exotic mortgages effectively printed new currency, by enabling people who truly couldn’t afford to buy a house to enter the housing market.
    Aside from those who were able to make a tidy profit by buying and flipping, the big winners were real estate agents and mortgage brokers. The losers are the rest of us.

  9. Rocky — Yes, that’s the one. Thanks.