Housing Is Not a Drag on the Recovery

The Morning Edition piece on President Obama's new mortgage refinancing proposal implied that the housing market is a major drag on the economy. This is misleading.

The housing bubble was the motor of the economy during the last business cycle. It did this both by leading to a construction boom and by propelling consumption through the creation of $8 trillion of ephemeral equity. Now that the bubble has burst it can no longer play this role, however it is inaccurate to describe it as a drag on the economy.

Since the comments suggest some confusion, let me be clear on what I mean by housing is not a drag on the recovery. The graph below shows real expenditures on residential construction over the last two years.

Note the direction that spending on residential construction (sorry, mislabeled the graph) has been going. That's right, it has been going up! This is why some of us say that housing is not a drag on the recovery.

Now will housing be the force that leads out of the recovery? No, and it would be extremely foolish to expect otherwise, as I have written about endlessly. We got into this downturn because of the housing bubble. This led to a huge amount of overbuilding of housing. It will take years to wind this down to a more normal level.

This is exact opposite of a typical recovery which is led by housing. That is because a typical recession is caused by the Fed raising rates to slow the economy. That has the effect of slowing housing construction. When the Fed decides to take its foot off the break and lower interest rates to boost the economy, there is major pent up demand, which leads to a boom in housing. That is not the story here.

The wealth created by the housing bubble also led to a consumption boom. This is the long-known and widely forgotten housing wealth effect. This consumption boom is also not coming back for the simple reason that the housing bubble is not coming back.

Okay, so the collapse of the housing bubble caused the recession, which I probably have said more than any other person on the planet. But, at the moment housing is not a drag on the economy, it is adding to growth, even if it is not adding as much as we might like.

AR U With NAIRU or AR U Against Ephemeral Equity Equality (EEE)?
written by izzatzo, February 02, 2012 5:40 AM

Housing is too a drag on the economy as repeatedly hammered by an obscure economist known as Whose Your Nanny Baker in explaining how the deep recession deep sixed NAIRU and EEE for years to come.

Wealth is wealth regardless of its source and
creates demand, ergo propter hoc when it disappears into the ephemeral ether so does the demand.

Some economists need to get out more and see zero sum outcomes for themselves before spouting off non sequitors like this one.

Stupid liberals.

-2

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written by kharris, February 02, 2012 7:18 AM

"...it is inaccurate to describe it as a drag on the economy."

Ah, Dean rises to the level of "'cause I say so" argumentation. Nothing in Dean's response actually shows the NPR view to be mistaken (as his headline claims), or even misleading (as his text claims). All Dean tells us has to do with what happened before the bubble burst. It is also worth noting whether housing, which typically leads expansions, is making as big a contribution as in past expansions.

The facts are that housing was a drag in every quarter through the recession, and has been a drag in 40% of quarters since. So, it's "misleading" to claim without qualification that housing has not been a drag. Once again, Dean's insistence on making his point in a simple-minded, absolute way leaves him doing pretty much what he claims his target is doing - misleading his readers. Given Dean's claim to being a corrective for bad economics in the press, this is a very disappointing performance.

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Housing and the Secret of Present Tense
written by dean, February 02, 2012 7:28 AM

Kharris,

please note the use of the word "is" in the title of my note. Housing has made a positive contribution to the economy for the last three quarters and 4 of the last 5. It is not a drag for that reason.

For reasons that I have written about on this blog and elsewhere hundreds of times, housing will not provide the same boost to this recovery as it has in past recoveries. That does not make it a "drag" in English speaking areas.

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written by skeptonomist, February 02, 2012 8:40 AM

See this chart of housing starts since 1900:
http://www.skeptometrics.org/HousingStarts.png
House construction is now lower than ever except during the depths of the Depression and the world wars (it has gone up only slightly in the last year). Construction peaked around the start of 2006, so this down-cycle has now gone on for seven years without making a real move up. When a major segment of the economy remains far below normal like this, it is a drag.

This is not something that has to be accepted, like the tide or sunspot cycles. There are things that could be done to clear up the foreclosure mess - Dean has suggested some - but very little has been done, I think primarily because banks don't want to accept losses of any kind. Thanks to the bailout, they are making good profits without any new mortgage business. I think that Dean's insistence that housing is "not a drag" is counter to one of his main messages, that control of the economy has to be taken back from big-money interests such as banks.

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written by skeptonomist, February 02, 2012 8:45 AM

Sorry, housing starts have not gone up in six years.

editor, LBO
written by Doug Henwood, February 02, 2012 9:54 AM

How can housing not be a drag on the economy? There's still a lot of bad debt left over - debt on underwater houses. The wealth effect is working in reverse. Residential investment, normally a leading sector early in a recovery, is now anything but. And it's going to take more time, maybe a lot more time, to work through this.

Of course, the U.S. economy has a lot of other problems. But this is a big one.

-1

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written by two beers, February 02, 2012 12:04 PM

If you think that a slowly-correcting housing is a drag on the economy, than you are asking for a new housing bubble.

You can't base a healthy economy on housing. You can base a Ponzi economy on housing, however.

The main drags on the economy are wars, exorbitant health care costs, and not enough well-paying jobs.

Dean is right that housing is not a drag on the economy.

;;;;
written by mel in oregon, February 02, 2012 12:53 PM

well the loss of trillions in home equity, the 25%+ of homeowners that owe more on their homes than they are worth is certainly a major factor in the depression we are now in (regardless of what it's called). other factors are the moving of 10 million jobs overseas (called globalization); taxcuts for the wealthy, war spending on iraq, afghanistan & pakistan; military hardware systems that are not cost effective such as the f-35 fighter, star wars, etc. the list could go on indefinitely, but cepr.net isn't a site to write a book. bottom line is america lost its way a while back, & we'll be damn lucky to have a vibrant economy 30 years from now. enjoy...

Housing IS a drag
written by Cedric, February 02, 2012 12:54 PM

Residential investment has a disproportionate impact on GDP growth. Consequently, residential investment tends to lead the nation into and out of recessions. Notwithstanding the large overhang of housing, slowing household formation and impaired household balance sheets has taken the wind from the sails of a usual source of GDP growth in recoveries. Whether you want to call that a "drag" or a "lack of pull", the effect is the same. We won't have RI to help the recovery. Other sectors have been doing the heavy lifting. It explains why job growth is so slow. So the story isn't wrong at all, just a particular know-nothing blogger's pedantic interpretation of it.

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written by two beers, February 02, 2012 1:46 PM

Cedric- Housing is adjusting to its historic mean. It's correcting. By your view, a normalizing market is a drag on the economy. Please explain the paradox.

Pedant impedance
written by David, February 02, 2012 10:03 PM

It takes only a smattering of psychology and a bit of reflection on the definition of "drag" to realize the only pedant here is Cedric, who is a r drag on the intellect.

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written by kharris, February 03, 2012 11:07 AM

Dean finds it necessary to narrow his claim to the quarters in which it is true, and to assert his superior understanding of English usage in order to be able to justify his otherwise highly questionable assertion. He requires us to take into account his prior positions in order to justify the over-reach of his latest view. This is commonly the way with Dean's writing. If Dean were less smug, less school-markish, less self-justifying, then high-school debating tactics would not be required to defend his positions. Small-minded insistence on your first inadequate statement of your view does not make that view better. It just makes you small-minded. Climb down from your high horse and you'll come far closer to writing the truth the first time out.

-1

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written by kharris, February 03, 2012 11:28 AM

"That does not make it a "drag" in English speaking areas."

Whenever someone claims that his use of language means what he intended it it to mean (or claims he intended it to mean), when it was taken to mean something else by a native speaker of the language, needs to go sit in a corner and ponder. As long as there has been modern linguistic theory, it has recognized that language use involves three separate elements. The intended utterance, the physical signal, and the utterance as perceived and understood. Now, with written utterances, it is rare the case that perception is a problem unless the signal has been corrupted, so we'll set that aside. What Dean is doing, and has done before when his use of language was so absolute as to be open to question, is to insist that the intended utterance (or what he later insists was the intended utterance) is the only possible way to understand what he has written. This is childish. Lots of people become childish when called out on their behavior - nothing special about it. But so often, Dean seems to start from a childish stance, one which claims reasonable views are wrong because it is convenient to his didactic purpose to make that claim.

Dean is not better qualified to declare the actual meaning of his utterances, whatever the language used, than an educated native speaker of the language. As such, any declaration on his part that things mean what he says they mean, rather than what his reader takes them to mean, is just silly.

-1

take a chill pill
written by frankenduf, February 03, 2012 12:41 PM

yo kharris- dude, it's sarcasm- when u deconstruct sarcasm, it ruins the whole rhetorical effect- that's why robots don't understand humor

hey man, bad shot
written by David, February 03, 2012 2:14 PM

One wonders what the intention behind kharris' utterances was? I was hoping for some meta-sarcasm, but I've sifted through and found it wanting. Thus, I would think kharris is being serious, but that would mean he takes statements at face value and doesn't have (what is it? will? capacity? energy?) to see the other facets or read between the lines. That his perceptions are restricted to his limited context, a context he finds difficult (impossible?) to expand upon (well, we all have limited space for our brains to expand). The economy of his neurons is not running at full capacity, or perhaps they are devoted to noting the purely apparent while ignoring the totally obvious? I am bepuzzled, indeed.

Housing Is Not a Drag on the Recovery

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