It’s the Housing Bubble, Stupid!

A few years ago, we had a housing bubble. Have you heard? Apparently, many writers haven’t.

Check the major newspapers. Everyone is writing about the economy. For almost five years now, they’ve been predicting strong economic growth just around the corner. And for almost five years, they’ve been wrong. Stumped. Surprised.

The recession ended three years ago, they say. How can unemployment still be so high? How can growth be so slow?

So they make up explanations, usually political. Their economic models failed. Their credibility is in doubt. They must blame someone else. So they blame the government.

Taxes are too high, they say, even though taxes are lower than they were before the recession. Regulations are too strict, they say, even though corporations are making record profits. The stimulus slowed growth, they say, even though it created or saved over 3 million jobs.

And they never mention the housing bubble. Even though everyone and their dog knows that the collapse of the housing bubble caused the recession.

From the end of World War II to the late 1990s, housing prices tracked inflation. There were booms and busts in the 1970s and 1980s, but they always came back to the same long-run average. Then, from 1998 to 2006, they rose approximately 90 percent, after adjusting for inflation. They’ve been falling ever since.

Real housing prices are now about 10 percent above their long-run average, as is the price-to-rent ratio. Which means they still have further to fall, but we can finally see the light at the end of the tunnel.

If you’ve taken Econ 101, you’ve probably heard of the “housing wealth effect.” It says that, for every dollar that housing wealth declines, consumption shrinks by 5 to 7 cents. Since the peak of the housing bubble, we’ve lost almost $8 trillion in housing wealth. That’s $400 to $560 billion less consumption. And that doesn’t include indirect effects, like the resulting stock market decline, which lost another $4 trillion in wealth.

It takes an even bigger chunk out of overall output when you add residential investment, which fell 24 percent in 2008, 22 percent in 2009, and 4 percent in 2010.

Given that knowledge, it’s hard to imagine anyone predicting a strong economic recovery while housing prices still have further to fall.

But the housing market is improving. Residential investment has started to grow again, as has construction employment. Whereas there was a huge glut of unsold homes in 2009, that inventory is almost back to normal levels. Existing home sales have been increasing for the last six months, though new home sales are still stuck near their post-recession low.

The decrease in unemployment is what everyone is talking about, but it’s mostly due to people dropping out of the workforce — being so discouraged that they stop looking for work — rather than a significant increase in jobs. The number of job openings was unchanged in November. 200,000 new jobs in December may sound like a lot, but it would take 100 more months just like it — that’s 8 years — to return to full employment.

A lot is riding on a turnaround in the housing market, including Barack Obama’s re-election. If the administration wants to increase its odds of staying in the White House, it’s not taxes or regulations or government spending that need easing. It’s struggling homeowners.

They can start by appointing an FHFA director who will encourage borrowers with government-backed loans to refinance at lower interest rates. And they need to be more aggressive in investigating widespread mortgage servicing fraud at major lenders.

We are nearing the end of the Great Housing Bubble. It has gone up, and now it’s almost done coming down. Let’s hope we learned our lesson…at least for a little while.


This op-ed was published in yesterday’s South Florida Sun-Sentinel.

A Failure to Communicate, Not a Failure to Stimulate

It’s a little difficult to reply to Prof. Mishra’s latest op-ed because it doesn’t really have a point. It goes all over the place. As far as I can tell, the only actual argument he makes against President Obama’s American Jobs Act is:

…the first stimulus bill in 2008, a $700 billion package geared toward government spending to stimulate the economy, and financed with borrowed money, has obviously failed to create new jobs.

He never offers any evidence to support this claim.

I’ve disproven this hypothesis before, but I’ll do so again — first by repeating what I said last time, then with even more evidence. If you’ve already read the first part, you might want to skip to the new stuff, though it can’t hurt to refresh your memory…   Continue reading “A Failure to Communicate, Not a Failure to Stimulate”

The Ethical Investor: August 2010

I want to write an investment newsletter, but I don’t like the pay-and-email model. I want it to be transparent, and like everything I write, I want the information and analysis to reach as many people as possible. So here it is. I wrote this first edition last Monday, but it took a week to get some feedback and rejigger the format. If any of it is out-of-date, now you know why. I most regret that I didn’t post it in time for you to take advantage of this. — AWO

It’s a stupid time to start an investment newsletter.

Economists are worried about a “double-dip” recession, public and private debt are at record levels, the world has just escaped two financial crises in three years, and the Chairman of the Fed says the future is “unusually uncertain.” With record-breaking temperatures outside, a smart person would work on their tan until the economy returns to normal.

Trouble is, I don’t know what “normal” looks like.   Continue reading “The Ethical Investor: August 2010”

Why Some Economists Still Aren’t Smiling

Jim Hamilton, truly one of the best macroeconomists of his generation, may not be smiling, but he’s getting closer. At all times, Hamilton keeps a cartoon face—smiling, frowning, or neutral—on his blog Econbrowser to represent his outlook for the economy. It’s like security threat levels for the business cycle. Yesterday, Hamilton replaced the longtime frowning face with a neutral one.   Continue reading “Why Some Economists Still Aren’t Smiling”