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Housing Will Not Drive the Next Recovery   June 3rd, 2011
The housing collapse hurt the economy because too much of our economy revolved around it       

 
QUICK OBSERVATIONS

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It has been said that home prices won't rebound until jobs come back. But a lack of jobs isn't what caused home prices to drop, jobs won't automatically cause home prices to rise, and housing won't be driving the recovery when it eventually comes.

Home prices won't rebound until jobs come back. But jobs won't come back until the housing mess gets fixed...

Housing typically helps lead the way in an economic recovery not only through a surge of construction and the hiring that goes with it, but though demand for goods and services that go into forming a new household...

"Our mantra all along has been employment, employment, employment," Duncan said. "Until you see employment growth and then income growth and then household formation, you don't get to the bottom of this."


There are three problems here:
  • Housing being such a major contributor to our recoveries.
  • There is a finite (limited) need for housing and too many houses.
  • The drop in housing prices wasn't and isn't caused by unemployment.

Housing's Excessive Contribution to Recoveries

It's indicative of a systemic problem that housing has been such a major part of our economy and past recoveries.

Housing--whether it be single-family homes or apartments--is just a necessity of life, much like food and milk. Just as we wouldn't expect necessities such as food and milk to be drivers of a recovery, it's not good that we expect housing to be a major contributor to a recovery either.

Housing is wealth and is a destination for wealth, but it doesn't create wealth. It just sits there occupying land and giving us a place to sleep.

That being the case, in the long-term, it's not possible for housing to be something that truly drives a recovery or an economy--rather, home construction is the result of a recovery and a strong economy. The fact that, for decades, it seems to have been the other way around is suggestive of just how backwards our economy has been and reemphasizes why we are where we are.

Finite Need for Housing / Too Many Houses

There is a finite need for housing. We can't build houses forever--nor forever depend on housing construction to drive the economy--because eventually we'll have enough. In fact, we most likely already do.

From 1970 through April 2011 our country has been building an average of 1.5 million housing units per year--for a total of 61.6 million new units. During that same period of time, our population has grown by about 110 million consisting of 54.1 million new households.

So over the last four decades we've built 61.6 million new housing units for 54.1 million new households--an excess of 7.5 million probably unneeded houses. Indeed, there are approximately 1.25 million new households formed each year so it's unrealistic to expect construction to exceed 1.25 million units per year over the long-term. But, again, we've been building 1.5 million units per year on average.

Is it any wonder we have approximately ten million unoccupied homes throughout the country?

We've been too dependent on building too many houses to drive our recoveries and our economy as a whole. Like so many things in our economy, it's not sustainable. While we need new homes for our growing population, we've been building far more homes than our growth demands.

This is why we have a glut in homes. Regardless of the state of the economy and whether or not everyone has jobs, we simply have built more homes than we need.

Unemployment Didn't Cause Housing Collapse

It wasn't unemployment that caused the housing market to collapse.

The housing market collapsed because we built too many homes and encouraged people that were historically and realistically renters to recklessly borrow money to buy homes they could not afford. Since so many renters were entering the housing market, it created a temporary and unsustainable increase in demand. This led to skyrocketing home prices which enticed even more renters to become buyers, which fueled the need for more construction.

But as is the case with everything that's unsustainable, it could not be sustained. Those that could not afford their homes eventually sold or were foreclosed on. One way or another, all those homes that were built in excess of the real long-term demand are sitting unoccupied (or will be in the near future).

It should be noted that home prices started dropping no later than early 2007 while unemployment didn't exceed 5% until January 2008. Thus the collapse of the housing market preceded problems with unemployment. So the problem in the housing market didn't happen as a result of unemployment. It happened because too many houses were built and because people that couldn't afford homes bought homes.

An eventual recovery in employment is not going to fix a problem that wasn't caused by unemployment in the first place.
    [One caveat is that an eventual improvement in employment may lead to an illusion that we immediately need more houses. This could lead to the construction of more homes while we still have an oversupply of unoccupied homes available on the market. So, paradoxically, an improvement in employment may unwittingly contribute to the construction of more houses on top of the excess houses we already have, further compounding the housing glut and leading to more downward pressure on housing prices... either immediately or in the future].

Housing Won't Drive the Recovery

That housing has contributed so much to our economy and past recoveries has been an aberration that we shouldn't expect to repeat. Recoveries and strong economies are produced and sustained by increases in productivity and innovation, not by building more houses than we need.

The data would seem to indicate that we've built about 7.5 to 10 million too many houses. Given 1.25 million households created per year, that would suggest our oversupply of homes could take 6-8 years to exhaust if we were to actually stop building homes. If we continue building homes (as we almost certainly will) even though we already have too many, it will be even longer until the oversupply is consumed. And as long as we have too much supply, the housing market will not truly recover.

Since we can't artificially create demand or increase housing prices (that's what led to this collapse in the first place), the government should not attempt to prop up the market. We're wasting valuable time and money trying to do so and it's hindering the economy.

And if we're expecting the housing market to pull us out of this recession, we're going to be disappointed.

The recovery will come from hard work, innovation, and increases in productivity. Not from accounting gimmicks and bailouts with printed money from the government in fruitless attempts to defy the laws of supply and demand in the housing market.

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