The ongoing drag of housing on the U.S. economy

When we talk about housing woes, there’s a tendency sometimes to focus on falling (perhaps now bottoming) prices. And that’s a legitimate focus: declining home values have left many homeowners underwater on their mortgages, have cut deeply into Americans’ net worth, and have produced fundamental changes in the typical behavior of would-be buyers and would-be sellers.

But home prices are just part of the much bigger story of housing’s importance to the economy.

New residential investment is typically a driver out of recession, but our recent deep recession and financial crisis were largely due to excessive housing speculation and construction. Since there was simply no way that housing could drive us out of this recession, there was never really any doubt that the current recovery would be slow, choppy, and ugly — no matter what moves public officials made.

Armstrong economics professor Nicholas Mangee covers a lot of this ground — and more — in his dense Savannah Morning News column today: Our economic times: The persistent impact of the housing market on the economy and jobs

From the column:

How does a persistently poor housing market impact jobs prospects? With downward pressure on prices, many families unwilling to take a capital loss on selling may become tied to their properties. Such immobility in the labor market shrinks the pool of workers available for job opportunities, hindering the ability to match job and skill set.

Moreover, residential investment may impact the labor market through two channels. The direct channel affects construction, engineering and real estate agency jobs. The indirect channel affects all those secondary firms manufacturing the intermediary goods used to produce the homes. The extent to which the latter is affected by a fall in residential investment is particularly difficult to assess.

Thus, a fall in the housing market may have a whirlwind influence in dampening the labor market and economic growth.

Take a look at the following graph from Calculated Risk, which shows residential investment as a percentage of GDP going back to 1947. Note how rarely and briefly it even fell below 4%. In this downturn, the percentage has fallen from over 6% to nearly 2%.

There are no easy fixes for this.

Sure, there are some things that might have helped:

  • Some of the mortgage modification programs could have been more streamlined and pushed more aggressively a couple of years ago.
  • We could have abandoned the vanity of the homebuyer tax credits, which had no other real effect than to drag out the price bottoming process for at least a year.
  • We could have tried to create incentives for faster household creation.
  • The Fed could be spending more time worrying about employment than inflation (it’s clear which half of its dual mandate it has been most concerned about).

But at the end of the day, even if every possible policy move had been implemented perfectly, it’s likely we’d be in only slightly better shape than we are now in terms of housing and in terms of the broader economy.