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The Higher Education Bubble: It's About To Burst

 June 07, 2010 11:42 AM



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 Glen 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."
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