Hous­ing is al­ready in a slump, so it (prob­a­bly) can’t cause a re­ces­sion

The Charlotte Observer (Sunday) - - Business - BY CONOR DOUGHERTY

The United States has had 11 re­ces­sions since the end of World War II. All but two were pre­ceded by a big de­cline in the hous­ing mar­ket.

In­side that bit of trivia lie some fun­da­men­tal in­sights into hous­ing’s out­sized role in the busi­ness cy­cle, along with clues to sug­gest that the econ­omy is on firmer foot­ing than the in­creas­ingly pes­simistic fore­casts make it seem. The gist is this: The United States may or may not en­ter a re­ces­sion this year, but if it does, hous­ing is un­likely to be the cause, be­cause it never re­ally re­cov­ered in the first place.

“Hous­ing is not in a po­si­tion to lead this thing down,” said Ed­ward Leamer, an eco­nom­ics pro­fes­sor at the Univer­sity of Cal­i­for­nia, Los Angeles.

How much it can help pro­long the over­all re­cov­ery is an­other mat­ter. Home sales and prices have been slug­gish in the face of ris­ing in­ter­est rates. Still, the pace of con­struc­tion, com­bined with pent-up de­mand from young adults, sug- gests that the sec­tor should at least re­main sta­ble in the face of un­cer­tainty else­where.

Why is hous­ing so of­ten a fo­cus of anx­i­ety as eco­nomic ex­pan­sions run their course? Here are a few rea­sons.


Even though hous­ing does not ac­count for all that much of the econ­omy, its role in re­ces­sions is huge, be­cause it is highly cycli­cal and sen­si­tive to in­ter­est rates. Think of ex­pan­sions and re­ces­sions as the cy­cle of things that go up and down a lot. Hous­ing is a big de­ter­mi­nant of where that cy­cle is headed be­cause, un­like many other sec­tors, it has mas­sive swings.

The hous­ing sec­tor ac­counts for as lit­tle as 3 per­cent of eco­nomic out­put dur­ing re­ces­sions and about twice that dur­ing booms. Other pieces of the econ­omy are much big­ger, but they don’t change nearly as much from boom to bust. Gov­ern­ment spend­ing, for in­stance, has hov­ered be­tween 17 per­cent and 20 per­cent of the econo- my for decades. The 3per­cent­age-point swing is about the same in each case, but gov­ern­ment ac­counts for much more of the econ­omy. Trans­la­tion: Hous­ing punches way above its weight.

As a re­sult, while hous­ing has never ac­counted for more than 7 per­cent of to­tal out­put, it has on av­er­age ac­counted for about a quar­ter of the weak­ness in re­ces­sions since World War II, ac­cord­ing to a 2007 pa­per by Leamer ti­tled “Hous­ing IS the Busi­ness Cy­cle.”

After hous­ing, the sec­tor that has his­tor­i­cally been sec­ond most im­por­tant to re­ces­sions is con­sumer durables, or ex­pen­sive pur­chases like cars, fur­ni­ture and appliances. Those are of­ten con­nected to the hous­ing mar­ket’s pros­per­ity be­cause peo­ple usu­ally buy other things when they pur­chase a home.

Some­times down­turns have other causes, but they only un­der­score hous­ing’s role in eco­nomic cy­cles. The 1953 re­ces­sion fol­lowed a de­cline in gov­ern­ment spend­ing after the Korean War ended, and the 2001 re­ces­sion was driven by a de­cline in busi­ness spend­ing after the dot-com bub­ble popped. Both were rel­a­tively brief and shal­low – the 2001 re­ces­sion was the least se­vere since World War II – in part be­cause hous­ing in­vest­ment re­mained sta­ble.

The most re­cent re­ces­sion, from 2007 to 2009, of­fered one of the more ex­ag­ger­ated ex­am­ples of hous­ing’s guid­ing role in down­turns. A re­cent re­port from the Fed­eral Re­serve Bank of St. Louis found that the con­struc­tion sec­tor ac­counted for a lit­tle over a third of the de­cline in out­put in the past re­ces­sion, and about half of the job losses (a fig­ure that in­cludes laid­off con­struc­tion work­ers and job losses in con­nected in­dus­tries).

How does hous­ing look now? Mixed, but mixed in such a way that the things most im­por­tant to eco­nomic growth are the most sta­ble.


Mea­sured in sales and prices, the hous­ing sec­tor ap­pears to be in a pre­car­i­ous po­si­tion. Ex­ist­inghome sales were down about 10 per­cent in De­cem­ber from a year ear­lier, ac­cord­ing to the Na­tional As­so­ci­a­tion of Real­tors. The group blamed ris­ing prices and in­ter­est rates, and a lack of sup­ply that has left buy­ers un­der­whelmed by their choices.

Much of the prob­lem is that while job growth has been strong, home prices have gone up faster than in­comes.

Prices have gone up so far so fast that even mar­kets pre­vi­ously con­sid­ered af­ford­able are beyond the reach of many buy­ers. Home prices have risen by about 50 per­cent since 2012, ac­cord­ing to Zil­low, and many of the more af­ford­able mar­kets have shot up even faster.

In Phoenix, home val­ues have dou­bled since 2012, not ad­justed for in­fla­tion. The Den­ver mar­ket is up 90 per­cent, At­lanta is up 84 per­cent, Nashville, Ten­nessee, is up 78 per­cent and Dal­las is up 76 per­cent. If peo­ple can’t af­ford a home in Texas, where can they?

The sticker shock of ris­ing prices, com­bined with ris­ing in­ter­est rates that make monthly pay­ments more ex­pen­sive, scared off many buy­ers to­ward the end of last year. Some of that de­mand seemed to come back at the start of the year, after in­ter­est rates fell to roughly where they were a year ago.

Nev­er­the­less, homes are sit­ting on the mar­ket longer, price cuts are be­com­ing more com­mon, and a num­ber of home­builders have had lay­offs. Be­fore a re­cent speech to 1,000 peo­ple from the hous­ing in­dus­try, John Burns, founder of John Burns Real Estate Con­sult­ing, asked the au­di­ence to fore­cast the year ahead. They were evenly split be­tween those see­ing sales and price de­clines and those see­ing growth.

“Ev­ery­body is be­ing re­ally cau­tious right now,” Burns said in an in­ter­view.

This all sounds very bad, but for any­one who isn’t try­ing to sell a home or in the busi­ness of sell­ing homes, it’s not as bad as it seems.


When economists talk about a re­ces­sion in hous­ing, they largely re­fer to con­struc­tion, not home prices. Most of the in­dus­try’s con­tri­bu­tion to an­nual gross do­mes­tic prod­uct lies in res­i­den­tial fixed in­vest­ment, a cat­e­gory com­posed al­most en­tirely of the build­ing of sin­gle­fam­ily homes and apart­ment and con­do­minium build­ings (along with a small amount of home im­prove­ments and ren­o­va­tions).

Ris­ing home prices help the econ­omy in small but im­por­tant ways, like mak­ing peo­ple feel richer and build­ing up home eq­uity that own­ers can tap and spend else­where. But in­creased spend­ing from peo­ple feel­ing richer is not nearly as im­por­tant as the pace of home sales and the vol­ume of con­struc­tion, since both of those cre­ate many jobs – for peo­ple like real estate agents and mort­gage bro­kers on the sales side, and the ar­chi­tects, con­struc­tion work­ers, elec­tri­cians, plumbers and oth­ers who de­sign and build new homes.

Home buy­ing is weak and get­ting weaker, so that could be a con­cern. But con­struc­tion is bor­der­ing on mori­bund. To­tal hous­ing starts grew at an an­nual rate of 1.2 mil­lion a year in Jan­uary, more than dou­ble the re­ces­sion-era low of less than 500,000, but still well be­low an av­er­age of 1.5 mil­lion from 1990 to the start of the hous­ing bust – de­spite an ex­pand­ing pop­u­la­tion.

Clearly the need for hous­ing is there, so why aren’t builders build­ing more? That is a con­found­ing ques­tion.

Dur­ing con­fer­ence calls to an­nounce their earn­ings, pub­licly traded builders like D.R. Horton and Pul­teGroup have said much the same thing as real estate agents, which is that buy­ers are put off by higher prices and creep­ing in­ter­est rates. Many builders also cite lo­cal reg­u­la­tions that make it harder to build homes in denser ar­eas closer to jobs, and higher la­bor costs in a tight job mar­ket.

The over­all mes­sage is that builders can­not build homes at the prices peo­ple want in the places peo­ple want them, so they aren’t build­ing much at all.

The largest de­mand for hous­ing is at the lower end of the mar­ket, the hard­est to serve prof­itably, al­though in con­fer­ence calls a num­ber of builders said they were shift­ing some of their build­ing and land buy­ing to­ward cheaper, smaller homes. This may or may not im­prove the pace of build­ing.

The re­sult is that the hous­ing sec­tor – the res­i­den­tial con­struc­tion com­po­nents of GDP, taken to­gether – ac­counted for only 3.9 per­cent of the econ­omy in the third quar­ter, and has helped drag down over­all eco­nomic out­put for three quar­ters.

In other words: Hous­ing is in re­ces­sion al­ready. It might not get bet­ter soon, but it prob­a­bly won’t get worse.


A hous­ing de­vel­op­ment in Plano, Texas, is seen Oct. 26, 2015. Home sales and prices have been slug­gish in the face of ris­ing in­ter­est rates.

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