Can Housing Power the Economic Recovery?

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Economic recoveries usually begin at home. Even though the housing construction has historically only accounted for roughly 5% of America’s economic activity, that number tends to rise following recessions, placing a disproportionate burden on the housing sector to lead the economy to recovery.

Why is this? There are several reasons. First of all, since a new home is usually the biggest purchase any of us will make, we tend not to do it during recessions. Recessions cause housing demand to become pent up and then released once a recovery begins. Secondly, investment in a new home usually necessitates many other big ticket purchases like furnishing and appliances. Finally, construction is a a great source of relatively high-paying jobs for lower-skilled workers — the sorts of jobs that we’ve been sorely missing since the financial crisis. And just as housing construction creates demands for different consumables, it also has a trickle-down effect on employment, creating the need for real estate brokers, landscapers, and lawyers, just to name a few.

(MORE: Home Price Gains Continue Increasing Nationwide)

But the 2008-2009 recession was different. Housing didn’t come roaring back as it did after the 2001 and 1991 recessions. In fact, the housing sector continued to be a drag on the overall economy until last year. Not that this is surprising given the genesis of the recession was a real estate bubble — one that wiped out trillions in wealth and severely damaged the financial system.

But over the past year, the housing market has begun to recover. On Tuesday the analytics firm Core Logic announced that in February, home prices increased 10.2% year over year — the largest increase since 2006 — marking 12 straight months of year-over-year national home price increases. And the job market is starting to reflect these gains. Earlier this month, the Labor Department announced that the construction sector added 48,000 jobs in February and 151,000 total jobs since September. So we’re making progress, and housing seems to be a big factor.

(MORE: Will Reform of Fannie and Freddie Kill the 30-Year Mortgage?)

But this doesn’t mean we should expect a housing boom any time soon, or that we can rely on construction to bring the economy back to full strength, and here’s why:

1. The latest reports are only positive in comparison: Sure we’ve had almost a year of rising home prices, but that comes after more than three years of nearly uninterrupted home price declines, which reached a magnitude of 18% in some months.

2. Unemployment remains high and wages stagnant: Despite the recent gains in the job market, there are still 3 million fewer jobs in America than before the recession, while the average American’s income has fallen 7.3% since December of 2007. Since home price appreciation is driven by growth in employment and growth in income, we need to see more progress in these areas before we can expect a more robust housing recovery.

3. Americans are forming fewer households: The Census department defines a household as any group of people living together. From 1997 to 2007, Americans formed roughly 1.5 million households per year, but during the recession that rate fell to 500,000, according to Timothy Dunne, vice president of the Cleveland Federal Reserve Bank. While this number has crept up back above 1 million once again, there is still a big question as to what the “new normal” will be going forward.

Will young Americans continue to spend their twenties living with their parents, or will they strike out on their own the instant they have the opportunity, regardless of how difficult it is to make ends meet? Frankly, this question is impossible to answer. What is certain however, is that even if the economy continues to improve, many young people today are starting their careers with large student loan burdens and jobs that don’t pay particularly well. And for the time being, the recovery in the housing market is being driven by investors who are snapping up cheap properties rather than first-time buyers — as the National Association of Realtors has reported that first-time buyers purchased just 30% of buyers last month, as opposed to a more-normal 40%. But investors aren’t going to continue to drive price increases unless they believe there will be demand for rentals coming from — you guessed it — household formation.

This is not to say that the housing market isn’t playing a big role in our recent gains. But lets remember that the latest economic news, whether its GDP growth, job growth, or wage gains, has been only modestly positive. Our economic performance over the past year would be excellent during normal times, but it frankly hasn’t been anywhere near good enough to bring us out of the massive hole the recession caused. The fact that the housing recovery has begun is great news, but we’ll need more than a stable housing market to bring the American economy back to fighting weight.

MORE: Selling Your House? Choose Your Words Carefully

6 comments
Chosun1
Chosun1

Look beyond housing, to commercial real estate financing and construction.  It is a great indicator of the overall health of business.  Why?  Most of the institutions that create jobs also pay commercial rent.  Total commercial loan activity is still way off the mark.  Securitized commercial mortgages are at about 90% of their pre-recession level.  To put things in perspective, 1 bank used to do as much commercial mortgage activity as the entire market is doing now.  There is still a long ways to go, particularly when one considers that much of the infrastructure for lending, not just to home purchasers, but also to businesses, has been totally dismantled (the bankers aren't there to lend the money -- they lost their jobs, shuttered their businesses, etc.).  While we may not love bankers all the time, they do serve an important intermediary function.  Until they are fully operational, lending to businesses for capital improvements, real estate acquisitions, even paying salaries and rent on lines of credit, etc., the economy will continue to hobble.

SmoothEdward1
SmoothEdward1

The damage caused by the change in economic and taxing policies since 1980, the crisis it led to, the destruction of labor unions, and adoption of Free Trade Agreements that destroyed our middle-class, will take a long time from which to recover. We let it happen. It's our own fault.

yodadog
yodadog

With the departure of manufacturing over the last 30 years, and its replacement by the financial services industry as the largest sector in our economy (which produces wealth for a few, not jobs or goods for export), that economy is now (and has been for 20 years), dependent on consumer spending, an unsustainable base for growth. The only thing growing in the US is our debt, and the size of our government. It is also not only an unsustainable base for growth, it is causing that fall mentioned in antonmarq's post. 

antonmarq
antonmarq

Isn't it strange that banks and the real estate businesses "JUST DO NOT GET IT." The one and only thing that will drive this and every economy is JOBS. People are tired of hearing of the word "recessions" when we're have really been in a "depression" (externally and internally.)  If this country does not start hiring very soon, rising crime rates will continue, our infrastructure will continue to deteriorate, and eventually America will fall from its pedestal of power, all for the sake of a few greedy rich hell bent on hoarding cash.  

bryanfred1
bryanfred1

What taxing policies, exactly, are you referring to?  Income tax collections as a percentage of GDP throughout the 80s up to the 2008 recession were in line with historical figures despite lower rates, and were above the long-term average through the 2000s.  Why?  Because keeping more of one's income encourages economic activity.  The decline in union power likewise has nothing to do with our situation.  The things unions once campaigned for - workplace safety and other employees protections - have been black-letter law for a long time.  What unions have done is contribute to the bankruptcies of steel, air and auto industries due to ever-increasing demands (the "job bank," anyone??) and inflexibility in times of change.  Finally, free trade agreements.  I don't even know where to start with that one.  I suggest looking up "comparative economic advantage" as a first step.  Free trade didn't just suddenly cause our unemployment rate to leap to 11%.  NAFTA has been in place for nearly 20 years and we've had plenty of periods of full employment (i.e. <5% unemployment) during that time.  Blaming free trade is a complete red herring.