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Home Publications Blogs Beat the Press How and Why Housing Is Holding Back the Recovery

How and Why Housing Is Holding Back the Recovery

Thursday, 24 April 2014 16:08

Neil Irwin has an interesting piece in the NYT's Upshot section about how housing is holding back the recovery. There are two points worth adding.

First, the vacancy rate continues to be well above historic averages. In the fourth quarter of 2013, the most recent period for which data are available, the vacancy rate was still over 10.0 percent. This compares to a vacancy rate that averaged less than 8.5 percent in the pre-bubble years. This translates into a large number of empty units that will discourage new construction for some time to come.

The other point is that looking at the historic average share of residential construction in GDP may be somewhat misleading. If we go back to the 1980s, the share of medical care in GDP has risen by more than 6.0 percentage points. This increase must come from other categories of consumption. If we say non-health care consumption is roughly 60 percent of GDP, then a 6 percentage point rise in the share of health care in GDP would imply a reduction of 10 percent in non-health care consumption, if the consumption share of GDP stayed constant.

In fact consumption has risen as a share of GDP, but if we assume the consumption share will not rise indefinitely, it means that a rising share of consumption going to health care means a smaller share going to everything else. The implication is that we might expect housing to comprise a smaller share of GDP going forward than in the past. In that story we should still expect housing to recover further, but perhaps not to its average share for 1970s, 1980s, and 1990s.

Comments (5)Add Comment
Out of Focus
written by John Parks, April 24, 2014 8:32
The focus of "Why the Housing Market is Still Stalling the Economy" is misdirected.

With the privatization of our government, the citizenry is increasingly being commodified and the 99% is nothing more than a profit center to be fought over by the various corporate jackals.

The public carcass is being devoured and the pickings are getting slimmer.

The housing market will have to accept the hindmost until they too can procure protected status or buy legislated mandates requiring the peasants
to purchase their products.
Privatization of Government?
written by MBAissuesdotcom, April 25, 2014 7:41
Working for the government the past 20 years, seeing what the private sector can do in terms of savings and better quality has been daunting (albeit scary as we're not as protected). Being a Federalist society, should not most activities being privatized be welcomed? Government can still regulate these activities. But anything not related to actual law enforcement or decisions on use of force should probably be at least looked at for privatization. Less money going to government the more money being spent. Smart government is ok.
written by Dave, April 25, 2014 7:51
Housing is slow because of the capital dominance. The bubble was caused by capital dominance. How so? Just as Reich has been proclaiming for years now, the working classes have been able to participate in the economy largely through the borrowing of capital from the top. Since they no longer want to borrow to the hilt, and because many of them cannot be given loans responsibly, now we notice the capital dominance whereas we didn't during the bubble years.

And no, directly attacking this problem by encouraging a new housing asset price bubble or imprudent lending is not a valid way to create more demand.

Taxing the capital away and using it for something useful, now that could work...
written by skeptonomist, April 25, 2014 9:14
Look at trend levels of residential and total investment:


Residential investment has recovered some, but even if it comes back to trend level, say $2k/capita, this would not boost total investment anywhere near to the pre-recession trend level. In fact even if residential investment went back to 2006 bubble level it would not do this.

There is a huge deficiency of non-residential and total investment with respect to the long-term trend. This is in effect the problem of "secular decline" and there are various possible reasons for it. Of course one problem is the trade imbalance, as Dean often points out.
written by bananaguard, April 25, 2014 12:24

The short response is "nonsense". I'm not sure a longer response would do any good, but I'll offer this, just to be fair. All you have done is to state your preferences, treating them as if they are somehow a good guide to policy. Your preferences are no more important than anyone else's, and really, we ought to judge proper policy by results, not feel-good for guys with strong views.

I've worked for both the private sector and the public sector, and I can tell you, the private sector doesn't win any awards for quality of work or "saving", assuming you mean reducing costs. I don't understand why we should expect private firms to provide lower cost services. Government is in the business of satisfying, well, it's not clear anymore who government is trying to satisfy, but the theory was government was to aim at serving its citizens. Private enterprise is in the business of making money. Given those different goals, it makes sense that entities aiming at making money would charge more than those not aiming at making money. A number of studies looking at the cost of activity carried out by government, compared to activity the government pays private contractors to do. And whodaguessed, the results often show that work done by the private sector costs more. Much more.

Privatization, based on the evidence, seems to have been a bad deal for tax-payers, as well as for non-tax-payers.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.