Monday, June 07, 2010

The Higher Education Bubble: It's About to Burst

The Housing Bubble:
The Higher Education Bubble:

The top chart above shows the housing bubble in the U.S., using monthly median new home prices (Census data here) and the monthly Consumer Price Index (CPI, data here), back to 1978, where both series are adjusted to equal a value of 100 in January 1978.  The bottom chart illustrates a much, much bigger bubble than the real estate bubble - the "higher education bubble" - based on an annual comparison of the CPI, median new home prices and the CPI for "College Tuition and Fees" (data here).  Note that the housing bubble resulted from about a 4-time increase in home prices between 1978 and 2006, and college tuition has now increased by more than twice that amount since 1978 - it's gone up by more than a factor of ten times.  The college tuition bubble makes the housing price bubble seem pretty lame by comparison. 

According to Glenn Reynolds, writing in the Washington Examiner, "Higher education's bubble is about to burst":

"It's a story of an industry that may sound familiar.  The buyers think what they're buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they're buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn't.

Yes, this sounds like the housing bubble, but I'm afraid it's also sounding a lot like a still-inflating higher education bubble. And despite (or because of) the fact that my day job involves higher education, I think it's better for us to face up to what's going on before the bubble bursts messily."

Read more here.


At 6/07/2010 10:04 AM, Anonymous Anonymous said...

My dad kept books on all of us kids, and my semester's tuition at the state university was $231.50 in 1970. Room and board, $395. My son's tuition and room and board are $7000 per semester. That's more than 11x higher.

I earned $3 per hour upon graduation, while he will earn $30.

Best wishes from Kansas!

At 6/07/2010 10:07 AM, Blogger Unknown said...

Speaking of housing, 1st Quarter numbers in San Francisco indicate a 50% increase in prices from the 1st quarter of 2009. I know SF is a special case geographically but this has to be indicative of a real estate recovery in some way. Here is the article:

At 6/07/2010 10:10 AM, Anonymous morganovich said...

this trend is even worse at the high school level.

the price of my HS has tripled since 1990. the price of my university has "only" doubled.

i get the sense that a great deal of this is driven by scholarships. the more you give out, the more those who do pay have to and, perversely, the more people who need assistance.

at $45k a year, schools like my HS are now completely out of reach for the middle class. my parents could never have sent me with prices as they are now. coming out of high school $200k in debt before going on to college and racking up another $300k is simply outrageous.

you are likely correct that this has reached the point if unsustainability. what 22 year old can handle a half a million in debt right out of the blocks?

At 6/07/2010 10:18 AM, Anonymous morganovich said...


i live in SF. the real estate market here is still at pretty low levels, just up from what was a total heart attack.

pretty much every SF mortgage is a superjumbo. that market went away entirely in 2009 and while better in 2010, is still not great.

the high end rental market here is galloping as many 2 income professional couples who would have been buyers cannot get financing.

At 6/07/2010 10:25 AM, Anonymous gettingrational said...

How do you get rated rated the best value in private universities? You cut administrative staff and postpone long-term projects BUT continue to hire faculty and maintain financial aid.

The best rated private U is Caltech and the second is Princeton which has an average student debt at graduation of $5,955!

BTW, I wonder if college counselors counsel also on the subject of high student debt?

At 6/07/2010 3:39 PM, Anonymous Dave said...

I've been blogging about there being an education bubble since October of '08, though I agree with Dr. Perry that it still seems to be inflating.

At 6/07/2010 4:37 PM, Anonymous Craig said...

My dad kept books on all of us kids

Your annual college expenses equate to $3,520 in today's dollars. So, your son's expenses have doubled inflation.

Your $3 wage would bring $17 now, so your son's $30 shows he's a very, bright boy, indeed. Congratulations. You've beat the system.

At 6/07/2010 6:15 PM, Anonymous Mr. Econotarian said...

Are those number "sticker prices" for college tuition, or "actual student costs"?

"Freshmen entering private colleges in the fall of 2008 typically received a 53.5% tuition discount. So if a school’s tuition was $35,000, the family would pay $18,725."

At 6/08/2010 12:18 PM, Blogger Tom said...

There is a government bubble, which includes a public schools bubble. Government schools are absurdly expensive, in the failed attempt to improve the quality of education. Let's hope both bubbles pop soon.

At 6/08/2010 7:48 PM, Anonymous Ian Random said...

Why not try WGU at $3k/6 months?

Couple that with cheap Asian books in English:

And you'd have an affordable education.

At 6/10/2010 7:05 AM, Anonymous Character Education said...

Government schools are very expensive and normal people can't bear their expenses. I suggest that government should give some relief to the students. Now at current time we don't have any option but to wait for the time when these bubbles pops up.

At 9/01/2010 10:01 AM, Blogger Unknown said...

I work at a public institution who's tuition has increased steeply within the last 8 years. Not coincidentally that's the same period we had a Governor who believed in cutting state support for Higher Ed, and shifting the costs onto families with children in college.

The actual cost of education has gone up a small amount, and to help hold the line on costs we've discontinued capital projects, reduced maintenance to a trickle, and cut staffing by almost 10%. But simply absorbing the huge cuts in our state support has more than doubled tuition in the last 8 years. If we were to rely solely on the State support and the tuition of 8 years ago, we'd have a small handful of buildings open, a tiny faculty, and virtually no staff support - we'd be able to educate 75% less students at best.

At 9/01/2010 1:35 PM, Blogger Steve said...

The term bubble applied here does not make any sense. A college education is not an equity.

At 9/02/2010 7:17 AM, Blogger -Dustin said...

Eventually we're going to hit a limit and people are going to realize the depleting return on a college education. I think we're there with a lot of professions. A diploma could put you at, I'm guessing, $25-30k/yr. A BA in English from a private school might put you at $30-35k/yr, but also leave you with $10,000 in loan payments per year, putting you behind where you would've been. If I was going to school for the arts, I definitely wouldn't go for anything but a state school.
Technical professions (say, engineering), can still bring you up to $50-60k, but their salaries are creeping up at 2%, while the education prices are going up at 6-8%. It's only a matter of time.

(Doing the math on all of these numbers I pulled from my butt, it's only going to take 20 years for even engineering degrees to not pay back their cost.)

At 9/02/2010 7:18 AM, Blogger -Dustin said...

Also, I would LOVE to see health insurance premiums and average health care costs on this graph too.

At 9/04/2010 12:29 PM, Blogger Jeffrey Yasskin said...

I don't think "bubble" means what you think it means...

If education costs go down, that doesn't make my already-bought education less valuable. I am not more likely to buy an education because education prices are increasing.

I am more likely to start a school because education prices are increasing, but that's part of the negative feedback inherent in a market, not the positive feedback that causes bubbles.


Post a Comment

<< Home