The average price of a house has risen dramatically in the U.S. since 2003, prompting many to wonder if there is a housing “bubble,” and when it could burst. Economists say prices are bound to drop or level off, but exactly when is anybody’s guess. But the same science that now predicts earthquakes could predict the rise and fall of housing prices.
The average price of U.S. homes has risen steadily, with only a few minor dips since the Great Depression of the 1930s. But house prices have surged dramatically over the last few years, a trend some economists say cannot continue indefinitely. Scientist Didier Sornette agrees. “It’s absolutely non-sustainable. This bubble is basically ending now, and has ended in some cases.”
Mr. Sornette, a University of California (Los Angeles) geophysicist, believes the same formula that’s used to predict when and where earthquakes will strike, can also be used to predict the moment when the U.S. housing market could crumble.
He studies what’s known as “complexity theory” to analyze the numerous factors that come into play when determining possible outcomes. “It emphasizes the whole more than the parts, it emphasizes the interactions.”
As Mr. Sornette explains in Discover magazine, analysis of the interaction between positive and negative factors within the housing market can provide measurable indicators of how many people will sell their homes to make a profit and how many are willing to buy.
University of Houston physicist Joseph McCauley says Mr. Sornette’s theory is promising, but contains too many variables. “It’s got too much freedom in it. I’d like to see him or someone else go back and get rid of the freedom in this model, and constrain it, so that it really could be considered hard science.”
Mr. McCauley says true complexity is based on surprises, something he says mathematics cannot quantify. An example is what he calls “the greater fool” theory — or the faith that you can sell something in the future to a greater fool than yourself for an even higher price than what you paid.
Mr. Sornette plans to continue refining his formula but says his method has been successfully tested in many systems — from extreme weather to stock market crashes.
– VOA News
