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Home Publications Blogs Beat the Press What's Holding the Economy Back? The Collapsed Housing Bubble, End of Story

What's Holding the Economy Back? The Collapsed Housing Bubble, End of Story

Wednesday, 28 November 2012 08:38

The major media outlets did their best to ignore the housing bubble as it was growing to ever more dangerous levels. Incredibly, they still cannot recognize and understand the bubble even after its collapse sank the economy. Hence we get the Washington Post offering us 10 charts that explain "what is holding back the economy."

Of course the Washington Post is a large corporation so they can waste money on unnecessary and misleading charts. Since CEPR is a small not-for-profit, we explain it all in one chart.


Source: Author's calculations.

The basic story remains as simple as can possible be. We had a huge building boom that went bust. Instead of building houses at a near record pace, construction fell back to the lowest level in 50 years due to enormous oversupply. Similarly, the consumption boom that was driven by $8 trillion in bubble generated housing equity faded when that wealth disappeared.

The Post piece holds out the hope that underwater homeowners will increase annual consumption by $400-$500 billion when they get above water. That would imply around $40,000 a year in additional consumption from families with a median income of around $70,000. This is not the sort of stuff that deserves to be taken seriously. It's also important to remember that the ratio of consumption to disposable income is unusually high, not low.

The other items on my chart are the falloff in non-residential construction following the collapse of the bubble in that sector and the drop-off in state and local government spending that resulted from the loss of property taxes and other revenue following the collapse of the bubble.

This single chart very simply tells the story of the housing bubble. If the Post needs make work projects they can always have people make up charts for no reason, but it would be better if they didn't include them in the newspaper. It might confuse readers.


Comments (11)Add Comment
written by skeptonomist, November 28, 2012 9:30
The peak rate of house construction around 2006 was nowhere near a record level:


There was never an actual bubble in construction rate, just a continuous ramp up after the 1991 recession. Construction has always been highly cyclic, and the increase from 2000 to 2006 was very small compared to previous jumps. Of course house ownership is much higher than it was in 1944, so pinning down a sustainable or "normal" rate of construction is tricky.
Housing starts include rentals
written by Dean, November 28, 2012 10:00

the data on starts include rentals, so the homeownership rate really shouldn't be relevant. The question is the rate at which we are building homes relative to the rate of HH formation. We might have expected that to be very high in the 70s and 80s when the baby boomers were first forming their own HH. It would not likely be high when the baby boomers were downsizing in the 90s and 00s as their kids moved away from home.
written by cbroming, November 28, 2012 10:14
Why is this chart 3-dimensional? I thought you small, non-profit guys preferred simplicity of exposition and visualization as well as of explanation. How the author reached these values would be revealing. Nevertheless, I agree with your post; consumer debt overhang is only one side of the story and the relationship depicted in this chart captures both sides quite efficiently.
written by Mcwop, November 28, 2012 10:34
What kills me is that there still is no comprehensive plan to make refinances easier - especially with houses the have bad LTV ratios. If you are making your payments, and have good credit you can afford the lower payment. However, good luck getting that refi under many circumstances. So that is money that could be freed for consumption. HARP falls way short of what is needed.
Stop paying interest on reserves!
written by Scott Supak, November 28, 2012 12:26
@cbroming, If you follow the link "Author's calculations" you will see how Mr. Baker reached these values.

@Mcwop, perhaps if the Fed stopped paying way more interest on reserves than the law prescribes, then the banks would be more willing to take some risk and make those refi loans. At the moment, they can sit on their butts and get 0.25% on reserves, while the law says it should be the rate of short term interest (the 3 mo treas is 0.10%).
written by Lrellok, November 28, 2012 12:59
First, there have been several stories in alternative media indicating that the housing bubble has not fully collapsed. Large amounts of real estate was kept off markets post bubble by speculators and banks, either investing in potential rental units or wishing to artificially supporting housing prices by constricting supply. This would indicate that the constraint is not the debt overhang, but a failure of housing to reach clearing price, resulting in miss-allocation of capital (or its retention by intransigent actors).

Second, i still cannot find where you are getting that $70,000 number for households.
The US median is listed here at $50054. Thats a huge difference, especially since we are talking in terms of disposable income and consumption. $40k additional spending from $70,000 implies a savings preference shift, $40k additional spending from a base of $50k clearly implies that inequality is reached the point of a significant constriction on markets. One number shifts the entire question. I know where my number is coming from, i would very much appreciate to know where you got yours.
written by Emersberger, November 28, 2012 1:26
Hey Lrellok

Homeoweners would tend to have higher a median income than [b[ all people. The link you posted is for all households - not just for those who own their homes.
Other factors.
written by Jack, November 28, 2012 4:24
I'd like your opinion regarding other factors which are continuing to hold back the economy. The loss of equity in home values certainly accounts for a great deal of consumer fear of spending. Crappy levels of pay are yet another reason that many feel that concern. And what of loss of retirement investment? The housing bubble went pop and the market took another of its precipitous falls grinding the 401K and IRA accounts of workers into the mud.

Granted that these additional factors may originate from the bursting bubble phenomenon, but they have now a life of their own and they are certainly reasons to be fearful of spending.
the economy
written by mel in oregon, November 28, 2012 6:43
the economic situation is far worse than you have described it dr baker. not that what you have said in this article & in many more articles you have written for many years isn't true. the building bust is responsible for the recession/depression. but that doesn't fully tell readers how awful the economic situation is. you see mortgages were cut up & sold as derivatives all over the world when the subprime mortgage crisis began. so you might have part of your mortgage in england, part in hong kong & part in chicago. wells fargo & bank of america didn't even know where the heck the loans were. that's what triggered the attorney generals in every state in the country to look into the fraud of these banks. when glass-steagall was repealed, banks no longer had to have the reserves to cover any losses. so speculation became the order of the day. wallstreet financial banks & institutions used highly leveraged money to engage in all manner of ponzi like schemes. that's why hank paulson went running to congress for a bailout of goldmann sachs which he had ran as ceo. the billionaire paulson knew when banks lost money, john q taxpayer would come to the rescue. i mean why bother if you are a wealthy businessman investing in land, buildings, equipment & labor when you put up your own money & probably get your investment back in 20 or more years. the easy way is to speculate using highly leveraged money (many put in less than 2% capital). you can short the market, do micro second trading & bingo you have made more in 6 months, than the old boring manufacturing business would make in 200 years. plus, when a crash happens, your insurance policy is the 3 branches of the federal government who bail you out at taxpayer expense. it's called shadow banking & is still alive & milking the sytem for all it's worth. according to the financial stability board, shadow banks own $67 trillion in assets. the reason this is important is, in an unregulated financial environment, the probablity that there will be another crash that will dwarf the bursting of the housing bubble isn't a possibility, but simply an event that can be predicted just as surely as you & other economists such as paul krugman correctly predicted the housing crash a decade ago.
Pretty Harsh, Dr. Baker!
written by Christopher, November 29, 2012 1:44
WashPost may have fallen short of a coherent central thesis in that "WonkBlog" post, but at least the data was real and they're worth looking at and analyzing independently.

While many of their charts, poorly explained, can be incredibly misleading, it's still worthwhile to look at the offshoots of issues that spin off from the central problem of the housing collapse.
written by fresno dan, November 29, 2012 5:20
I enjoy your your debunking of so much economics, but I disagree that our economic troubles are ALL housing. If one takes OUT the housing boom, we would have been in a stagnant economy, i.e., current conditions. If you have ever looked at the spending that was financed by HELOC's, which was built upon a chimera, it is easy to understand that a lot of "wealth" in this country is nothing more than IOU's built upon fraud.
The fact is there are less young people, with considerably less income than they used to have.

Peak Oil
"We like to think that the reason we enjoy our high standard of living is because we have been so clever at figuring out how to use the world’s available resources. But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that was relatively easy to obtain for about a century and a half."
"My view is that stagnant world oil production and doubling in the real price of oil over 2005-2010 put significant burdens on the oil-consuming economies. Optimists may expect the next century and a half to look like the last. But we should also consider the possibility that it will be only the next decade that looks like the last."

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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.