When it comes to the U.S. economic recovery, the conventional wisdom is that it’s all about housing. That’s where the majority of Americans keep the majority of their wealth. It’s 15% of the economy and has been driving what upswing we’ve seen so far — investment in residential housing has been expanding by over 10% a year, and contributing around a half a percentage point to our overall annual GDP growth.
But the housing news has started to turn sour. September sales are down sharply, in part because of a rise in mortgage interest rates. And there’s little doubt that October’s numbers will be bad too, because of the shutdown and the disruption to mortgage applications. Prices are still up, but they tend to lag the other data. It’s quite possible we’ll see a slowdown in those gains too.
Population growth means that the longer-term outlook for housing is still fairly bright (a recent Goldman Sachs report on the topic noted that the U.S. is creating around 1.3 million new households a year, and many of them will want their own picket fences). But as I’ve written before, I think the idea that housing can create a recovery is the tail wagging the dog.
To create a true recovery, we need income growth. Without it, people don’t have more money to spend, and thus can’t bring down their debt and take on new or bigger mortgages. (The average American’s credit score is still many points below what mortgage-lending banks want to see.)
To create income growth, you need unemployment to come down closer to 6%. (It’s 7.2% now and may go higher over the next few months as the shutdown-related statistics are tabulated.) That’s not happening. And we still don’t really know why.
Of course, the Fed is doing everything it can to keep the housing sector going. There’s talk, for example, that even if we start to see “tapering” on bond purchases, the Fed may stick with its program of buying mortgage-backed assets to bolster the home market. But housing experts don’t necessarily see this as a good thing. Earlier this week, I attended the Economist’s Buttonwood gathering, where Nobel laureate Robert Shiller was among the speakers. When asked about the recovery in housing, he said, “I’d much rather see the government raise taxes and fund infrastructure spending to create a recovery — it would be a lot better than cutting interest rates and possibly creating a housing bubble to stimulate recovery.” Wise words from the man who predicted the last housing crisis.