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Home Publications Blogs Beat the Press The WAPO Still Has Not Heard About the Housing Bubble

The WAPO Still Has Not Heard About the Housing Bubble

Saturday, 07 June 2014 13:05

It is amazing that the country has not taken everyone involved with economics -- academic economists, policy economists, economics reporters, and investment advisers -- and thrown them in prison or at least exiled them to some ungodly place where we (I'll go too) could never do any harm again. Look, the housing bubble was incredibly easy to see. I took arithmetic in third grade, apparently I'm the only economist who remembers it.

The housing bubble sent construction and consumption demand soaring, hence the relatively strong growth and low unemployment in the years 2004-2007. Then the bubble burst. In addition to all the fun associated with the financial crisis (bankers too dumb to see the bubble, but well-connected enough so that it didn't matter), the collapse of the bubble meant a huge loss in demand. Instead of having a boom in construction, we went to a big time bust since there had been enormous overbuilding. And consumption plummeted since the bubble-generated equity that was driving it had disappeared.

This is the cause of the recession and the weak recovery. We lost over $1 trillion in annual demand. What was going to replace it, hot air from politicians? Demand comes from consumption, investment, residential investment, government spending, and net exports.

That's it folks -- ain't nowhere else to get demand. So where did we expect the demand to come from to replace what we lost from the collapse of the housing bubble? Were consumers supposed to spend a a larger share of their income after they lost $8 trillion in housing wealth than when they still had that wealth? What have you been smoking?

Were we going to get an investment boom when most companies have vast amounts of excess capacity? I'll come back to residential construction in a moment. We could have the government spend lots of money to boost the economy, but Very Serious People in Washington want us to worry about the budget deficit.

That leaves net exports. If the "net" has you fooled, that's because it is exports minus imports that generate demand. We don't get any jobs from exporting car engines to Mexico to be assembled into cars that are re-imported into the United States. We could look to increase net exports, but that would mean talking about our trade deficit and we aren't supposed to do that. (Don't ask me why, but I don't recall any big pieces on the large jump in the April trade deficit that the Commerce Department reported on Wednesday.)

Okay, let's get back to residential investment which was the motivation for this tirade. The Post had an article with a headline complaining:

"The economy has reached a milestone. No thanks to the housing sector."

The point is that while employment has returned to its pre-crisis level, jobs in the residential construction are still way down.

"While jobs overall are back to their pre-recession peak, residential construction jobs are 34.5 percent below their peak.

"Even if the specialty contractor jobs are stripped away, the residential construction jobs are still way off, almost 27 percent down from the peak, according to a Freddie Mac analysis."

Ummm folks, no one told you about the housing bubble? We aren't going to get back to the number of jobs during the bubble years. We were building homes at a ridiculous rate during the bubble years, why would we expect to get back to the same rate? And, we still have extraordinarily high vacancy rates, according to our friends at the Census Bureau. This will depress new construction. There is no mystery here. 

(There is a separate issue in this article that requires some serious ridicule. The piece notes a sharp rise in the number of construction workers for each home being built. It attributes this to labor hoarding. This is what big manufacturing companies do during a downturn. It is not what small fly by night construction companies do. The reason why reported employment did not fall as much as housing units is that many workers were never reported on company payrolls. Construction companies hired hundreds of thousands of undocumented workers many of whom probably never appeared on their books. Also, many workers will be misclassified as independent contractors. That way the company doesn't have to pay for unemployment insurance, workers' compensation, and other benefits. The household survey finds close to 1.5 million more people working in construction than the establishment survey, which is pretty good evidence for this story.)

Comments (11)Add Comment
written by Barkley Rosser, June 07, 2014 1:24
Generally good post, but what is with this claim that you are the only economist remembering the housing bubble? OK OK, I know you are being hyperbolic or satirical or whatever, but you were not the only one who called it, even if I think you indeed may have been the first to do so.
Heck, just to get pompous here, I did a better job in the econoblogosphere of calling precisely when the recession would hit. You and Nouriel Roubini got all hot and bothered in late 2006 about falling construction activity and forecast loudly that 2007 would be a year of recession. It was not, and I warned you at the time that it would not be. This is on the record, and I called accurately why it would not be. The dollar had substantially depreciated so that exports surged, offsetting at least for 2007 the recession, which did eventually arrive, of course.
I think it is ironic that you now spend so much time focusing on the trade deficit and imports when you completely missed the boat back then on the impact of exports on holding off the coming recession. Keep up the good work anyway, but please, no more claims that you are the only economist who remembers the housing bubble, :-).
Barkley, I'm Happy to Give Credit
written by Dean, June 07, 2014 2:10
The point is that in the media we see endless writings as though people are utterly lost as to why the economy crashed and why it has not yet recovered. I wish they were turning to you as a source, but they don't, at least not in most of the reporting I see.

Anyhow, there is a very simple story that is easy to tell and fits the data very well. It is the story of a collapsed housing bubble. No missing pieces here. But with almost no exceptions news reports are still looking for the murderer even though we have the guy with the smoking gun standing over the dead body boasting how he gave the bastard what he deserved.
written by Barkley Rosser, June 07, 2014 7:22
I completely agree with your followup comment. Indeed,the media has simply continued to go to the usual ignorant suspects, as you have been pointing out for a long time.
written by watermelonpunch, June 07, 2014 10:23

Thumbs up.
Thank you Dean Baker for your endurance on this.
Why They Can't Find Lost Demand Under the Streetlight
written by Last Mover, June 08, 2014 6:24

The usual drunks under the streetlight looking for lost car keys because they're easier to find.

Pining for a return of the housing bubble in terms of employment is a tacit admission the bubble held up the economy and now they want it back.

They conveniently forgot the bubble replaced lost demand from falling wages. Without it, what would they be blaming now for lost demand? Certainly not low wages as one taboo topic off the table.

The glaring contradiction escapes them. Wanting the bubble back in terms of more housing sector employment to replace lost demand, says to Dean Baker they obviously forgot what the bubble did to the economy in the first place. The last place to look for rebound demand is in the overbuilt housing sector.

Demand cannot come back from the private sector because as Baker has shown repeatly in ratio terms, consumption and investment demand is already back to pre-recession levels, yet the trillion dollar output gap refuses to close.

The drunks cannot accept this as Baker holds their feet to the fire over the last 6 years. They keep looking under the streetlight for a rebound of lost demand and can't find it. It has to be in the private sector somewhere doesn't it, eventually bubbling up to self correct the economy as it always does under capitalism.

It can't be that the sustained trillion dollar hole in demand is proof of Keynes before their very eyes can it - that a capitalist economy can come to equilibrium below full employment for a long time and stagnate there - because there is no rebound demand to be had is there.

It just can't be. Here fellas, have another drink to austerity economics and let's go look under the streetlight some more. It has to be there somewhere.
written by skeptonomist, June 08, 2014 10:29
Actually houses were not being built at a ridiculous rate even at the peak of the bubble - you have to look at per capita rate:


The peak in 2005 of 7.0 starts per thousand was actually lower than the average 1946-2007 of 7.2. I think deciding on a sustainable rate at this point is not easy. Certainly it would be foolish to try to go back to the peak rate of the post-war boom in 1950, or even to the average rate (about the same as the peak 2005 rate). Home ownership has been fairly constant since the 70's, with only a modest increase during the bubble. Should there be an effort to increase ownership, or should the construction rate be such as to keep it constant?

Of course as Dean says the price bubble in housing was obvious, but in fact the construction rate in 2005 was not really alarming in itself.
Mian and Sufi
written by Peter K., June 08, 2014 10:38
Has Dean reviewed their book? (which appeared during his vaca.) It would have been nice if they mentioned his discussion and name and understand that they haven't even though I haven't read their book.



The review of Geithner's book could be taken as a review of Sufi and Mian since they are at odds.
written by skeptonomist, June 08, 2014 10:40
There was a significant increase in home ownership in the bubble:


or actually a trend starting in the 90's, but who is to say that any particular level is sustainable or not?
The decrease since the peak of the bubble must be partly due to houses in foreclosure limbo. Construction may probably not pick up until that inventory is cleared and then ownership should go back up. Too bad the administration has done so little to fix this.
written by watermelonpunch, June 08, 2014 8:23
I think it's not so much that any particular level of home owning would be on its own unsustainable or even very odd, but that given the relationship between wages and house prices being discombobulated then AND now... All of it's pretty odd. And I wouldn't think what we've seen and are seeing should be surprising or confusing given the context.
I mean hey technically every family in the world could own near half an acre, right .... but I don't see that happening without some pretty bizarre circumstances changing vastly!
The Housing Bubble
written by Bob, June 09, 2014 11:49
Agree as to the fact and significance of the bubble. However, it strikes me that your discussion of the issue, particularly your distinguishing it from the financial crises, mat be misunderstood (at least as I see it). Simply put: we would not have had the type of housing bubble we did without the collapse of lending standards and other failures of the banking and regulatory system. Strikes me that that too is a point worth emphasizing again and again, just as you do in repeating the loss of demand as a result of the bubble is the key to where we are economically.
written by Amileoj, June 09, 2014 3:48
"Demand comes from consumption, investment, residential investment, government spending, and net exports."

And it's worth pointing out as well that, of these sources of demand, there is only one that is directly and fully under our control, namely government spending (specifically the federal component of it).

All other demand sources can be affected, if at all, only indirectly. Only federal spending can be set at whatever level we wish, whenever we wish, assuming the political will to so.

So, of course, it is the one instrument that is regarded by the conventional wisdom as entirely out of bounds for the purposes of demand management!

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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.