When I began blogging in early 2009 I made a number of claims that seemed almost preposterous. One of those was the claim that people had reversed causation; the housing crisis didn’t cause the recession, it was mostly a product of the recession. This seemed crazy, as the housing crisis began well before the recession.
I distinguished between two phases of the housing crisis. The first phase occurred during 2006-08, and was concentrated in the 4 subprime states. It did lead to a modest slowdown in growth, and unemployment rose from 4.7% in January 2006 to 4.9% in April 2008. But nothing severe. The second phase of the housing collapse was much more severe. When NGDP started falling rapidly due to tight money, housing prices fell all across America. This triggered the severe banking crisis of late 2008, and was associated with a worsening of the recession—unemployment reached 10.1% by October 2009.
Day by day, month by month, opinion is imperceptably shifting in my direction. Indeed so much so that a news article that basically proves my point seems to have elicited little surprise. “Of course a severe recession would hurt the housing market.”
Let’s consider the original conventional wisdom, and then my heretical view of early 2009.
1. The conventional wisdom was that we built way too many houses, and that the housing slump was a hangover from this effect. If true, housing construction over the past 10 years ought to have been way above normal. In fact, it has been way below normal. Which leaves the puzzle of why we have so many empty houses.
2. My view was that the severe recession greatly reduced the demand for housing. Since very few Americans are homeless (in percentage terms), a reduction in demand for housing should imply an increase in average household size. And that’s exactly what we’ve seen:
The number of people living under one roof is growing for the first time in more than a century, a fallout of the recession that could reduce demand for housing and slow the recovery.The Census Bureau had projected the average household size would continue to fall to 2.53 this year. Instead, the average is likely to hit 2.63, a small but significant increase because it is a turnabout.
“A funny thing happened on the way to the future” says Arthur C. Nelson, director of the Metropolitan Research Center at the University of Utah. “Household size increased.”
. . .
USA could end this decade with up to 4 million excess housing units because of the reversal in household size, he says.
A key factor: “The Great Recession has forced doubling up among both family and non-family members,” Nelson says.
Multi-generational households are on the rise: 49 million, or 16% of the population, live in a home that had at least two adult generations in 2008. In 1980, there were 28 million, or 12%.
According to a recent Pew Research Center report, the growth is due to demographics, cultural shifts and high unemployment.
“I think it’s the young adults,” says Dowell Myers, housing demographer at the University of Southern California. “Residential mobility has slowed down and when it slows down, they’re back in their parents’ houses or living with roommates.”
Household size began inching up in 2005, before the recession, a trend that might have been driven by the real estate boom that made housing unaffordable to many. Now, it’s more likely to be caused by the poor economy.
“There are a lot of trends going on,” Nelson says. Among them:
– Older Americans.They’re moving in with children and grandkids and vice versa. About 20% of people 65 and older live in multi-generational households
– High unemployment. It’s keeping young adults out of the job market and back home with their parents.
“Clearly, a lot of people are not forming households when they’re getting out of school,” says Karl Case, economics professor at Wellesley Collegewho helped create the Standard & Poor’s/Case-Shiller Home Price Index.
It’s not just that people are not buying homes. They’re not renting either, a sign that more people are squeezing into one unit.
“I can document this with my own students,” Case says. “Rental vacancy is the highest it’s ever been.”
– Immigrants. They have higher fertility rates and a cultural acceptance of extended families living together. Despite a decline in the influx of Hispanics since the economy soured, household size inched up.
“It’s going to have huge implications for the housing market,” Nelson says.
If it lasts. Many economists and demographers are convinced that as soon as the recession ends and jobs open up, Americans will return to their old ways. “I see it as temporary,” Myers says.
“The economy is the most important thing,” says Stephen Melman, director of economic services at the National Association of Home Builders. “Projecting lifestyles is a really tricky business.”
Hayek warned that if the Fed let NGDP fall you’d get a “secondary deflation.” And that’s exactly what we got. The first (small) part of the housing crash was a necessary adjustment. The second much bigger part of the collapse was clearly the result of tight money reducing NGDP. NGDP is the money people have to buy houses—it’s national income. With less NGDP there will be less demand for housing. You’ll have empty houses at the same time as people doubling up because they can’t afford houses. Just as during the Great Depression you had farmers unable to sell their food, and hungry people who couldn’t afford to buy food.
We were a little poorer in 2008 than in 2006 because we misallocated resources into foolish housing construction. We were a lot poorer in 2010 than 2008 because the Fed made us a lot poorer.
HT: John Quiggin, Tyler Cowen.
PS. The recession also reduced immigration, which reduced housing demand even further.
PPS. Notice the headline of the USA Today article is still reversing causation.