Why hasn’t the housing recovery helped the economic recovery?

Most people are convinced that the housing crash contributed to the recession, even though the facts suggest otherwise.

Now people are convinced that the housing recovery has helped speed up the economic recovery:

The housing market is rebounding faster than anyone thought possible, according to Blackstone Group LP (BX)’s global head of real estate Jonathan Gray, as the Federal Reserve buys mortgage bonds to keep rates near record lows and investors sop up a diminishing supply of properties for sale.

.  .  .

Arizona’s capital city is leading the U.S. in price appreciation, surging 22 percent in the 12 months through October, according to an S&P/Case-Shiller index, which had the biggest year-over-year advance since May 2010. Eighteen of the 20 cities in the index showed increases from a year earlier.

.  .  .

Home values climbed by more than $1.3 trillion to $23.7 trillion since the end of 2011, according to Zillow, and prices will rise by 3.3 percent after an estimated 4.5 percent jump last year, based on estimates of 15 economists and housing analysts surveyed by Bloomberg. Sales of existing homes will increase about 7.2 percent in 2013 to 4.98 million, the highest since 2007.

.  .  .

The improving housing market has already helped the broader economy heal after the crash triggered the worst recession since the Great Depression. The unemployment rate has dropped to 7.8 percent, the lowest level since January 2009 and Fed officials in December projected economic growth in a range of 2 percent to 3.2 percent in 2013. Consumer spending, which accounts for about 70 percent of the economy, is also showing signs of improvement. Retail sales rose more than projected last month, according to Commerce Department figures today in Washington.

“For most middle class households, homes are by far their biggest asset,” Weaver said. “So once the housing market starts to recover it helps consumer spending, it helps the whole economy.”  (emphasis added.)

Nice theory, but there is just one problem.  The economy has grown no faster during the 2012 housing recovery, than during the previous few years.  Nor is it expected to grow faster in 2013.  That’s because monetary policy is only allowing for a bit over 4% NGDP growth (for 3 plus years.)  So any faith is the curative powers of a housing recovery are pretty much like the faith that the 2009 stimulus sped up recovery:

1.  It might me true.

2.  It doesn’t show up in the data.

3.  It all depends on how the Fed reacts to the housing recovery.  So far they haven’t reacted well.


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34 Responses to “Why hasn’t the housing recovery helped the economic recovery?”

  1. Gravatar of Nick Bradley Nick Bradley
    21. January 2013 at 07:22

    While I agree with you that the economy can’t recover with only 4% NGDP growth, how are transmission channels supposed to work properly when owning an underwater home serves as an albatross around the consumer’s neck?

  2. Gravatar of ssumner ssumner
    21. January 2013 at 07:53

    Nick, Are you asking how we get more NGDP growth ,or how more NGDP growth leads to more RGDP growth? If it’s the former, then as the Fed raise sit’s NGDP target, velocity will speed up. It does not rely on factors such as consumer confidence.

    NGDP rose very fast in Zimbabwe, even though their consumers were far worse off than ours.

  3. Gravatar of Tommy Dorsett Tommy Dorsett
    21. January 2013 at 07:54

    Scott – We had nearly 6% NGDP growth in Q4. Forward indicators suggest this will be sustained. I’d simply say ‘headwinds’ are turning to ‘tailwinds’ and the Fed’s new policy should allow that to boost overall spending on output. Moreover, if investment demand/spending improves due to an actual or anticipated housing recovery, the Wicksellian real interest rate may rise. Back in 2007 the Wicksellian rate was likely falling while the Fed held short rates at 5.25%, causing base growth to stop. Now, if the natural rate rises, the banking system may do a large OMO, transforming excess reserve balances into required reserves and currency. We’re already seeing commercial bank credit up 6% y/y, the fastest since the recovery began.

  4. Gravatar of James in London James in London
    21. January 2013 at 07:58

    Tommy
    Commercial bank credit rising or falling is neither here not there. You could have a recovery in NGDP with falling commercial bank credit. I think you should. There’s still too much credit around, inflated by the generous tax shelter given to interest payments versus dividend payments and other returns to equity.

  5. Gravatar of Hailey Hedge Hailey Hedge
    21. January 2013 at 08:02

    Gents– Banking systmer collapsed due to housing bust.
    Fed fell behind curve.
    Now system is healing. Fed is trying to support with open ended expansionary policy.
    Hai

  6. Gravatar of Bauer Bull Bauer Bull
    21. January 2013 at 08:09

    Time to get into Greece, Gold and Gordian knots.
    Looking for 2000 in 13

  7. Gravatar of Geoff Geoff
    21. January 2013 at 08:41

    Dr. Sumner:

    “Nice theory, but there is just one problem. The economy has grown no faster during the 2012 housing recovery, than during the previous few years. Nor is it expected to grow faster in 2013. That’s because monetary policy is only allowing for a bit over 4% NGDP growth (for 3 plus years.)”

    Why hasn’t 4.2% NGDP growth for 3 plus years been associated with healthy economic growth? Isn’t 3 years plenty of time for “demand side” problems to pricing have been solved by now? Are there people who are STILL stubbornly holding out for higher selling prices over 3 years running for their unsold labor and assets, which is decreasing overall output and thus real GDP?

    Who in their right mind would be stubborn for 3 years plus like this?

    At what point should a slagging economy in an environment of stable NGDP growth (to reiterate, it’s been 3 plus years already) lead me to conclude that the main problem (not just “a” problem among many problems) isn’t insufficient nominal demand, but something on the “real side”?

    At what point should I conclude that the cause for the slagging economy is the inflation itself, rather than it being insufficient, because maybe real recovery needed a massive dose of deflation to finally fix the “main” problem?

    Please note, I’m just brainstorming/speculating here, so don’t look too much into this. After all, I am not against NGDP targeting, provided that I am the sole primary dealer of course. I am just trying to understand why I should NOT conclude that stable NGDP growth is not causing the sluggish real growth, given that this is the evidence that currently exists.

  8. Gravatar of Geoff Geoff
    21. January 2013 at 08:43

    Typo:

    “I am just trying to understand why I should NOT conclude that stable NGDP growth is causing the sluggish real growth, given that this is the evidence that currently exists.

  9. Gravatar of josh josh
    21. January 2013 at 09:08

    Isn’t the Fed’s current policy, while not an NGDP target, asymmetrical (floor but with a pretty high ceiling), so a housing recovery could lead to higher velocity for a given base, without expectation that the Fed will tighten?

  10. Gravatar of Suvy Suvy
    21. January 2013 at 10:05

    It’s because household balance sheets aren’t repaired yet. We have a high level of household debt which takes longer to be cleared than business sector debt because households are not very willing to go bankrupt(you can’t simply throw out your kids or restructure your debts as easily). This manifests itself in low levels of consumer demand and low levels of retail spending–like we’re seeing now. Household debt is falling and has been since 2008.

    I think the graph is real GDP and not NGDP, but the idea is clear. For NGDP, the drop in debt is sharper, but that’s the only difference.
    http://research.stlouisfed.org/fred2/series/HDTGPDUSQ163N

  11. Gravatar of W. Peden W. Peden
    21. January 2013 at 10:15

    Geoff,

    Nominal instability can be hurt when there is price rigidity. For example, the raising of minimum wages and the length of unemployment benefits discourages price adjustments.

    At this stage, I think that we can increasingly attribute problems with the US economy to supply-side factors.

  12. Gravatar of Geoff Geoff
    21. January 2013 at 11:13

    W. Peden:

    Yes, I agree that holding prices constant and then decreasing nominal demand, will result in unsold surpluses. But then why does nominal demand fall at all? I don’t think it’s enough to say “The Fed didn’t create enough new dollars to prevent the fall in spending”, because that still leaves unanswered the question of why the Fed had to increase inflation in order to prevent the fall in spending.

    Also, if nominal instability hurts when there are price rigidities, why not then have whatever inflation is necessary so that there are never any “price rigidity plus falling nominal demand” problems for anyone ever again? Why not have a 50% NGDP growth rate, or a 100% NGDP growth rate, or whatever NGDP growth rate is required that will result in no unsold surpluses for anyone’s labor or goods?

    With 5% NGDP growth, that leaves open the possibility that a portion of the population will set rigid prices in an environment where their nominal revenues/incomes decline, thus leaving them with unsold surpluses of labor and goods.

    With a higher NGDP growth rate, we can even eliminate that possibility, and prevent unsold surpluses for all people, not just “many” people.

  13. Gravatar of ssumner ssumner
    21. January 2013 at 11:32

    Tommy, Fourth quarter 2012 NGDP is not out yet, but it’s expected to be below 4%. Most 2013 forecasts are for around 4% NGDP growth, perhaps a tad more.

    Geoff, I’ve discussed that many times–price stickiness is not the main problem, wage stickiness is.

    Josh, It could, but is there any evidence it has? The article says housing helped speed up the recovery, but where’s the evidence?

  14. Gravatar of Nick Bradley Nick Bradley
    21. January 2013 at 12:45

    Dr. Sumner,

    I was just saying that removing negative assets from a household’s balance sheet should increase consumer confidence – by a lot.

  15. Gravatar of Tommy Dorsett Tommy Dorsett
    21. January 2013 at 12:54

    Sorry, I meant Q3GDP. Forward indicators suggest we’ll see 5-6% NGDP in 2013, 100-200 bps above consensus estimates. The Fed is finally getting some traction.

  16. Gravatar of josh josh
    21. January 2013 at 15:41

    Thanks Professor Sumner – would you say that current Fed policy + fiscal policy could raise NGDP, or is that just a kludgey substitute for NGDPLT?

  17. Gravatar of Geoff Geoff
    21. January 2013 at 17:34

    Dr. Sumner:

    “Geoff, I’ve discussed that many times–price stickiness is not the main problem, wage stickiness is.”

    I thought I mentioned wage stickiness. It’s what I had in mind as I was typing actually.

    I think my questions are still relevant. Who on Earth would withhold their labor from the market for THREE YEARS, demanding more than what is offered during that time? How in the world could they support themselves? Wouldn’t that support be the cause for wage stickiness and hence unemployment, rather than, or more so than, insufficient money and spending?

    At what point should a constant NGDP growth and sluggish economy lead me to conclude that the problem isn’t demand side, but real side?

  18. Gravatar of Peter N Peter N
    21. January 2013 at 18:44

    There’s no mystery about wage stickiness, Truman Bewley wrote a book about it 10 years ago.

    http://www.amazon.com/gp/product/0674009436/ref=oh_details_o07_s00_i00

    Employers don’t, in general, want to lower wages. They’d rather lay people off or reduce hours. The main reason is, roughly quoting:

    “If I reduce wages, I have a whole company full of unhappy employees. If I lay someone off, I only have one unhappy ex-employee.”

    Bewley covers the subject pretty thoroughly.

    If you think about it, the movement to flatter management hierarchies and increased employee initiative is fundamentally incompatible with wage cutting, and there’s the doctrine of respondeat superior. You’re legally responsible for what you employees do in a very wide range of circumstances. Unhappy employees can do enormous damage. It’s not worth the risk.

  19. Gravatar of Peter N Peter N
    21. January 2013 at 18:55

    ” the faith that the 2009 stimulus sped up recovery:

    1. It might me true.

    2. It doesn’t show up in the data.”

    It depends upon your counter-factuals. One third of the money went to the states to prevent layoffs of state employees. You can roughly calculate what the effect of this would have been, and it was substantial. Another 1/3 was tax cuts. It’s hard to argue that they had no effect, since the Fed wasn’t sterilizing them. Whether this had a good long term ROI, is a different question.

    So I think it does show in the data, and, IIR I’m not exactly alone in this.

    So, are you contending that had the money not been spent, the result would have been the same?

  20. Gravatar of Michael Michael
    21. January 2013 at 18:55

    I had an employer say exactly that during a salary freeze.

    I suspect that if cutting wages is not the norm, an employer who tried it would not only make his whole company unhappy, but would soon lose his most productive employees.

    I think employers probably gain some surplus because most employees don’t always have one foot in the job market looking to maximize their earnings. There are logical reasons why most employees do not in fact do this, but those reasons would go out the window in the face of a paycut.

  21. Gravatar of Peter N Peter N
    22. January 2013 at 00:14

    The improvement in sales is of existing stock, not new construction. Not a lot of boost there.

    What will help is increased consumer spending from improved confidence and much better balance sheets. Also the mortgage refinancing program is in full swing. Chase called me 3 months ago and asked me if I still fogged a mirror. I said yes. They said yes. No fees, no points, no appraisal, 1 piece of documentation.

    We’ll have a decent recovery if Europe holds together.

    BTW you wrote a while ago about losses at Fannie and Freddie, and IIR I said it was still early days. Well, you may have noticed the major banks have been writing them huge settlement checks. Seems that the GSEs had a putback clause for mortgages not meeting agreed standards. The GSEs audited the mortgages, and guess what? They failed.

  22. Gravatar of W. Peden W. Peden
    22. January 2013 at 07:52

    Geoff,

    I don’t find reductio ad absurdum’s based on misrepresenting the other side’s case interesting or intelligent.

  23. Gravatar of ssumner ssumner
    22. January 2013 at 08:41

    Tommy, I don’t agree, most indicators suggest slow growth. Look at interest rate futures.

    Geoff, Individual people have very little say over nominal wage rates.

    Peter N, I agree about wage stickiness. I’m claiming that the Fed has been satisfied with 4% NGDP growth. If fiscal authorities did less the Fed obviously would have done more.

  24. Gravatar of Doug M Doug M
    22. January 2013 at 09:06

    The housing collapse lead to a mortgage collapse, that in turn lead to a banking crisis. The collapse of the money supply in the middle of 2008 is directly related to the simultaneous collapse in banking.

    Depressed housing prices has deterred people from making “rational” economic decisions. For example people have refused to move to areas with more jobs because their house was underwater. I don’t know if these inefficiencies are significant or trival, but they are in my newspaper.

    My hunch is that in areas that were most hit by the crunch, valuations are still significantly below 2007 levels, and construction employment is still low. So while housing may be recovering, it is hardly a “driver” of activity.

    Buy, again it is my hunch that other factors are still restraining the availabilty of capaital, and the willingness to take on risk that keep real growth below potential, and will for still a couple of more years.

  25. Gravatar of Peter N Peter N
    22. January 2013 at 17:52

    “Peter N, I agree about wage stickiness. I’m claiming that the Fed has been satisfied with 4% NGDP growth. If fiscal authorities did less the Fed obviously would have done more.”

    The test will be the future. There’s a lot more potential consumer spending than in 2008, because of the huge improvement in consumer debt.

    For a housing recovery to take place, refinancing has to continue and inventory rundown has to turn into increased permits and starts.

    Calculated risk says:

    “Using the NAR surveys and sales reports would suggest 3.75 million conventional sales in December 2012 (SAAR), up 26% from 2.98 conventional sales in December 2011. That is a significant increase.

    Also fewer distressed sales probably means more housing starts and new home sales – and that is the key for housing providing a “boost” to the economy in 2013.

    Finally, when we look at the existing home sales report, the key number is inventory. And inventory is at the lowest level since January 2001, and months-of-supply fell to 4.4 months – the lowest since May 2005.

    For those looking at the correct numbers, this was the expected report – and it was solid.”

    He’s got a great track record. We’ll see if there’s a construction recovery starting once the weather gets warm.

  26. Gravatar of Geoff Geoff
    23. January 2013 at 04:30

    W. Peden:

    “I don’t find reductio ad absurdum’s based on misrepresenting the other side’s case interesting or intelligent.”

    Excuse me? What misrepresentations are you talking about? I find being accused of misrepresentations, without any explanation, uninteresting and unintelligent.

    I can say that I am being serious and honest. If I am misrepresenting Dr. Sumner’s position, it is completely unintentional.

    Dr. Sumner:

    “Geoff, Individual people have very little say over nominal wage rates.”

    And? Individuals taken together have all the say.

    I guess I don’t see the relevance of this comment.

    Why would people, either one individual or many individuals taken together such that we see what we see now, hold out for higher wages for 3 years running? What other reason is there for wages not falling to market clearing levels?

  27. Gravatar of W. Peden W. Peden
    23. January 2013 at 06:21

    Geoff,

    “Excuse me? What misrepresentations are you talking about? I find being accused of misrepresentations, without any explanation, uninteresting and unintelligent.”

    I’d recommend a closer and more charitable reading of your opponents’ positions, if you want to avoid it.

    “I can say that I am being serious and honest. If I am misrepresenting Dr. Sumner’s position, it is completely unintentional.”

    So, after all this time, you haven’t got your head around why Market Monetarists don’t favour adjusting NGDP targets to avoid unsold surpluses?

  28. Gravatar of ssumner ssumner
    23. January 2013 at 06:45

    Geoff, Individual people who have jobs often love sticky wages, they don’t want to take a pay cut—too bad for those who don’t.

  29. Gravatar of Suvy Suvy
    23. January 2013 at 07:04

    ssumner,

    “Individual people who have jobs often love sticky wages, they don’t want to take a pay cut—too bad for those who don’t.”

    I don’t think sticky wages are the reason that we don’t have full employment. In fact, in times like a debt deflation, sticky wages could actually nullify excess unemployment; especially because the debts are far more rigid.

    This is what Keynes wrote about the issue:
    “There is, therefore, no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment”
    This quote is from Chapter 19 of The General Theory.

  30. Gravatar of Geoff Geoff
    23. January 2013 at 08:07

    Suvy:

    “This is what Keynes wrote about the issue:
    “There is, therefore, no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment”
    This quote is from Chapter 19 of The General Theory.”

    Keynes believed that because he mistakenly believed that asset prices would rise in an environment of falling wage rates and prices. He essentially held costs constant and then imagined a fall in spending out of wage incomes.

  31. Gravatar of Geoff Geoff
    23. January 2013 at 08:12

    Dr. Sumner:

    “Geoff, Individual people who have jobs often love sticky wages, they don’t want to take a pay cut—too bad for those who don’t.”

    Sure, people who have jobs love sticky wages. But we talk about sticky wages because of how it is associated with unemployment, not employment.

    Those who are unemployed love earning flexible income for three years rather than no income for three years. Who would rather earn zero income for three years because they refuse to take a pay cut from their past wage rate? Time and hunger will turn even the most rigid wage into a limp spaghetti noodle.

  32. Gravatar of Suvy Suvy
    23. January 2013 at 11:34

    Geoff,

    I accidentally posted this on a different blog post, but the work asset never shows up once in Chapter 19 of The General Theory. In fact, Keynes never even conclusively says that there will be an impact on employment from flexible wages. Here’s a passage from Chapter 19 where Keynes talks about the possible impacts.

    “The most important repercussions on these factors are likely, in practice, to be the following:

    (1) A reduction of money-wages will somewhat reduce prices. It will, therefore, involve some redistribution of real income (a) from wage-earners to other factors entering into marginal prime cost whose remuneration has not been reduced, and (b) from entrepreneurs to rentiers to whom a certain income fixed in terms of money has been guaranteed.

    What will be the effect of this redistribution on the propensity to consume for the community as a whole? The transfer from wage-earners to other factors is likely to diminish the propensity to consume. The effect of the transfer from entrepreneurs to rentiers is more open to doubt. But if rentiers represent on the whole the richer section of the community and those whose standard of life is least flexible, then the effect of this also will be unfavourable. What the net result will be on a balance of considerations, we can only guess. Probably it is more likely to be adverse than favourable.

    (2) If we are dealing with an unclosed system, and the reduction of money-wages is a reduction relatively to money-wages abroad when both are reduced to a common unit, it is evident that the change will be favourable to investment, since it will tend to increase the balance of trade. This assumes, of course, that the advantage is not offset by a change in tariffs, quotas, etc. The greater strength of the traditional belief in the efficacy of a reduction in money-wages as a means of increasing employment in Great Britain, as compared with the United States, is probably attributable to the latter being, comparatively with ourselves, a closed system.

    (3) In the case of an unclosed system, a reduction of money-wages, though it increases the favourable balance of trade, is likely to worsen the terms of trade. Thus there will be a reduction in real incomes, except in the case of the newly employed, which may tend to increase the propensity to consume.

    (4) If the reduction of money-wages is expected to be a reduction relatively to money-wages in the future, the change will be favourable to investment, because as we have seen above, it will increase the marginal efficiency of capital; whilst for the same reason it may be favourable to consumption. If, on the other hand, the reduction leads to the expectation, or even to the serious possibility, of a further wage-reduction in prospect, it will have precisely the opposite effect. For it will diminish the marginal efficiency of capital and will lead to the postponement both of investment and of consumption.

    (5) The reduction in the wages-bill, accompanied by some reduction in prices and in money-incomes generally, will diminish the need for cash for income and business purposes; and it will therefore reduce pro tanto the schedule of liquidity-preference for the community as a whole. Cet. par. this will reduce the rate of interest and thus prove favourable to investment. In this case, however, the effect of expectation concerning the future will be of an opposite tendency to those just considered under (4). For, if wages and prices are expected to rise again later on, the favourable reaction will be much less pronounced in the case of long-term loans than in that of short-term loans. If, moreover, the reduction in wages disturbs political confidence by causing popular discontent, the increase in Liquidity preference due to this cause may more than offset the release of cash from the active circulation.

    (6) Since a special reduction of money-wages is always advantageous to an individual entrepreneur or industry, a general reduction (though its actual effects are different) may also produce an optimistic tone in the minds of entrepreneurs, which may break through a vicious circle of unduly pessimistic estimates of the marginal efficiency of capital and set things moving again on a more normal basis of expectation. On the other hand, if the workers make the same mistake as their employers about the effects of a general reduction, labour troubles may offset this favourable factor; apart from which, since there is, as a rule, no means of securing a simultaneous and equal reduction of money-wages in all industries, it is in the interest of all workers to resist a reduction in their own particular case. In fact, a movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices.

    (7) On the other hand, the depressing influence on entrepreneurs of their greater burden of debt may partly offset any cheerful reactions from the reduction of wages. Indeed if the fall of wages and prices goes far, the embarrassment of those entrepreneurs who are heavily indebted may soon reach the point of insolvency, — with severely adverse effects on investment. Moreover the effect of the lower price-level on the real burden of the National Debt and hence on taxation is likely to prove very adverse to business confidence.”

    He never conclusively says what could exactly happen because we simply can’t actually know what’s going to happen. This is a complex world, as Keynes points out.

  33. Gravatar of Suvy Suvy
    23. January 2013 at 11:36

    Here’s a copy of Chapter 19 in The General Theory that I found online. He never talks about asset prices in this chapter at all. The word asset doesn’t appear even once.

  34. Gravatar of Suvy Suvy
    23. January 2013 at 11:36

    Here’s a copy of Chapter 19 in The General Theory that I found online. He never talks about asset prices in this chapter at all. The word asset doesn’t appear even once.
    http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch19.htm

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