Saturday, May 19, 2012

The Higher Education Bubble vs. Housing Bubble

The chart above shows the historical relationship between: a) college enrollment rates for high school graduates (blue line, left scale) which have gone from 30% to almost 50% between the early 1970s and 2009, b) college enrollment rates for all 18-24 year olds (data here), which have gone from 25% to over 40%, and c) an index for college tuition adjusted for inflation (red line, right scale, only available starting in 1978), which increased more than three times between 1978 and 2009. The positive historical relationship between college enrollment rates and inflation-adjusted college tuition is similar to the positive, historical relationship between: a) homeownership rates and b) inflation-adjusted home prices, see chart below:

In the case of both college degrees and homeownership, the government decided the private market wasn't providing "enough" of either, and then created various government financing schemes to lend money to borrowers, often with questionable credit, at below market rates, along with providing other taxpayer subsidies and incentives to induce more people to go to college and more renters to become homeowners. In both cases, government policies created unsustainable bubbles, one for higher education and one for homeownership.  We're just coming out of the disastrous effects of a housing bubble that crashed heavily starting in 2006, and we might be in the early stages of a higher education bubble that is just starting to show some early signs of deflating.  Is that a hissing sound?


At 5/19/2012 10:33 PM, Blogger Jon Murphy said...

I hope you are right about a deflating college bubble, Dr. Perry. I fear that, should this bubble burst, it could make the housing bubble look minor.

This is also leading to an interesting phenomenon: We have 8.3% unemployment, but many factories and firms have worker shortages.

Once again, we see the government turn a surplus into a shortage.

All this goes to my point earlier: we don't want college educated workforce. We want a knowledgeable workforce. We have policymakers obsessing over one statistic (in this case, college degrees) but they miss the big picture.

At 5/20/2012 12:51 AM, Blogger PeakTrader said...

The tuition "bubble" coincides with the acceleration of the Information Revolution, after 1982.

I suspect, more higher education will be needed when the Biotech Revolution accelerates.

The U.S. attracts many of the best and brightest in the world.

The World's Top Universities 2011

The 2011 World University Rankings are dominated by U.S. schools. They hold 75 spots among the top 200...Seven U.S. schools are in the top 10.

The American system is robustly funded, with 2.7% of gross domestic product going to tertiary education...more than twice the average.

At 5/20/2012 4:57 AM, Blogger Larry G said...

You can find lists like this fairly easily:

Top 10 College Degrees by Highest Starting Salary

Petroleum Engineering $86,220
Chemical Engineering $65,142
Mining & Mineral Engineering $64,552
Computer Science $61,205
Computer Engineering $60,879
Electrical/Electronics & Communications Engineering $59,074
Mechanical Engineering $58,392
Industrial/Manufacturing Engineering $57,734
Aerospace/Aeronautical/ Astronautical Engineering

worst paying college degrees:

College Degrees Starting Salary Mid-career median salary
Social Work $33,400 $41,600
Elementary Education $33,000 $42,400
Theology $34,800 $51,500
Music $34,000 $52,000
Spanish $35,600 $52,600
Horticulture $37,200 $53,400
Education $36,200 $54,100
Hospitality/Tourism $37,000 $54,300
Fine Arts $35,800 $56,300
Drama $35,600 $56,600

and here is a cool tool for find less expensive colleges:

you are not doomed to going into debt up to your eyeballs to get a degree in an in-demand field.

It might be conventional wisdom aided and abetted by "easy" student loans but it is by no means the only path to a good education and a successful career.

But if one insists on going to an expensive college and majoring in a field that is not in demand and going into debt to do it - it is certainly an option and apparently a popular one judging by the numbers of students in debt and the numbers of graduates who cannot find work.

I agree with the basic premise that the govt involvement in student loans is ultimately feeding the frenzy as it did in the housing meltdown also.

but you don't need the baby-bath water cure necessarily.

For Housing, we could have limited govt incentives to one primary home at no more than median price and for students tie the loans to courses of study that orient to in-demand jobs.

In other words, it's not the govt's job to help you find your dream in world class basketweaving or advanced naval gazing.

The govt's interest ought to be to fill the jobs that are experiencing worker shortages... and let people who want to pursue jobs that are not in demand - do their thing - on their own dime.

At 5/20/2012 7:01 AM, Blogger Unknown said...

How can you coincide the housing bubble in the US to government policies, when in just about EVERY country there was a housing bubble at the same time

At 5/20/2012 7:52 AM, Blogger Larry G said...

re: worldwide housing bubble

a good question!

who caused the Worldwide Housing Bubble? eh?

At 5/20/2012 7:54 AM, Blogger Prof J said...

1) The slope on college costs seems to have increased quite dramatically around 2000 or the year after. Does anyone know what happened there?

2) @ Ray Medeiros: every country, really? I don't buy that. Also, have you checked into which countries do/do not have government policies that encourage home ownership?

At 5/20/2012 7:59 AM, Blogger Larry G said...

re: international housing bubbles:

At 5/20/2012 8:22 AM, Blogger PeakTrader said...

Many countries are positively interconnected with the U.S..

When the U.S. had the stock market bubble, from 1995-00, so did many other countries.

If the U.S. had a stronger economic recovery, other economies would be stronger too.

Soros warns of stock market bubble in US and Europe
22 January 1999

"Mr Soros argued that a speculative bubble was developing in Western financial markets.

The flood of funds from the emerging markets to the developed economies had led to high stock market valuations in the US and Europe, according to Mr Soros. "I see the development of an asset bubble as the next major threat to the system", he said."

At 5/20/2012 8:25 AM, Blogger marmico said...

Education in the U.S. is just like healthcare. Private sector expenditures on tertiary education are substantially higher relative to GDP than other OECD nations.

For instance, in 2007 relative U.S. private expenditures on education were 4 times as much and the results are problematic.

Correlation does not equal causation. What is the statistical significance of the positive historical relationship between college enrollment rates and inflation-adjusted college tuition?

At 5/20/2012 8:39 AM, Blogger Unknown said...

Spain's housing bubble

Ireland housing bubble

Australia housing bubble

At 5/20/2012 8:48 AM, Blogger PeakTrader said...

More foreign students studying in USA

"The number of international students at U.S. colleges and universities rose 4.7% to 723,277 during the 2010-11 academic year.

Enrollments have been on the upswing since 2006-07 and grew 32% over the past decade, IIE data show.

International students contribute more than $21 billion to the U.S. economy through tuition and living expenses."

At 5/20/2012 9:04 AM, Blogger PeakTrader said...

$21 billion / 723,000 international students = Over $29,000 a year for tuition and living expenses.

At 5/20/2012 9:28 AM, Blogger Jon Murphy said...

How can you coincide the housing bubble in the US to government policies, when in just about EVERY country there was a housing bubble at the same time

Ray, if you look into these international housing bubbles, you'll see that the afflicted countries all had similar housing policies.

At 5/20/2012 10:18 AM, Blogger Ironman said...

Here are three charts showing the inflation of the college tuition bubble from 1967 through 2010, with a preliminary estimate for 2011 for the third chart.

What the third chart confirms is that since 1990, during periods of recession, college tuition has become decoupled from U.S. household income. This decoupling corresponds to the federal government's increasing role in subsidizing higher education, whether directly or indirectly, such as through student loans.

Note that you don't see this pattern during the four major recessions from 1967 through 1983. Here, the cost of college remained closely coupled to the typical household income in the U.S.

In more practical terms, the consequence of that decoupling is that the cost of college tuition has become more and more unaffordable for the typical American household over time. Because of the federal government's intervention in the higher education market, colleges aren't receiving the signal from American households that their tuitions are increasingly out of whack, and as a result, they haven't adopted meaningful reforms for controlling their costs.

After all, why should they? With the federal government ultimately underwriting their students' bills, there's little reason for them to change....

What they really need is a Eureka College moment.

At 5/20/2012 11:54 AM, Blogger AtlantaDude said...

Purchasing a house can be delayed and when a large percentage of the market puts it off, the bubble can deflate. Conversely, it is not so easy to put off going to college, making it much more difficult to create a "buyers' strike".

Moreover, there is a ready substitute for housing - you can always rent and it has zero impact on your lifestyle. The substitutes for college (trade schools, etc.) are highly imperfect substitutes.

For these reasons, there are no imminent natural forces that are going to "pop" the education bubble.

This is why I believe that a nudge from government might be in order. Specifically, Obama should pass an executive order that says that in order to continue receiving federal research grants and other funding, the universities must offer online equivalents for at least one half of their degree programs, with the stipulation that these online degrees NOT be differentiated from campus degrees and that anyone meeting the minimum entrance requirements for the campus programs be admitted to the online program. This would create unlimited supply of brand-name university degrees, which would eventually bring prices down, while actually driving up revenues for the most desirable universities.

At 5/20/2012 12:27 PM, Blogger Unknown said...

Yes...they aren't due to government policies, but are due to private, central banking lowering the interest rates.

At 5/21/2012 7:27 AM, Blogger Jon Murphy said...

Yes...they aren't due to government policies, but are due to private, central banking lowering the interest rates.

So they are due to government policies. Central banks are run by the federal governments (including the Federal Reserve. They are only quasi-independent and have to answer to Congress. Most central banks are run directly by their respective governments.).


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