Society and Culture, Education

If You Thought the Housing Bubble Was Bad…

A topic that’s been getting a lot of deserved attention lately is the higher education bubble, starting with Glenn Reynolds’s June 6 Washington Examiner editorial, “Higher Education’s Bubble Is About to Burst,” and followed more recently with articles last week by AEI’s Michael Barone and Matthew Shaffer of National Review Online. Reynolds explained the situation this way:

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.

One way to help underscore the seriousness of the higher education bubble is to consider the two charts below.

The first chart shows graphically how the U.S. housing bubble developed in the late 1990s when median home prices (data here) started appreciating at a much faster rate than the Consumer Price Index (data here). The bottom chart illustrates a much, much bigger bubble than the real estate bubble—the “higher education bubble”—based on an annual comparison of consumer prices, median new home prices, and the Consumer Price Index series for “College Tuition and Fees” (data here).


Note that the housing bubble illustrated in both charts shows home prices between 1978 and 2006 increased by “only” a factor of 4.35, while the cost of college has increased by much more than twice that amount since 1978 in the bottom chart. Over the last three decades, college tuition and fees have gone up by a factor of 10.5, and they show no sign of slowing down. For the last 12 months through July of this year, the CPI for college tuition and fees increased by almost 6 percent, more than 4 times the 1.3 percent increase in consumer prices in general over that period.

Bottom Line: The ongoing increases in college tuition and fees make the housing price bubble seem pretty tame by comparison, and we should therefore be very concerned about the possibility that we might now be facing an unsustainable higher education bubble.

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