It made good sense for America to build lots of homes around 2002-06
Follow-up to previous post (read that first.)
When the tech bubble burst the Wicksellian equilibrium real rate fell to very low levels. In that situation, the Fed must cut interest rates sharply to prevent a sharp fall in NGDP and a depression. They did so. Whether they then raised them fast enough in the middle of the decade is a harder issue, and there are good arguments on both sides. But I’d like to focus on arguments for a housing boom in 2002.
In a classical world (on the PPF) less business investment should lead to more residential investment. Some commenters object when I call housing construction “investment.” Just like real men eat steak and not sushi, real investment is supposed to be factories and infrastructure, not houses. They see houses as a sort of consumption. America consumes too much, and houses are exhibit A. I think this is totally wrong; there is almost no entity that is more “capital-like” than houses.
A can of beer is a capital good that depreciates rapidly as you drink it. Hence we call it a “consumption good.” The longer-lived an asset, the more capital-like it is. In a recent comment section Mark Sadowski made this point:
Isn’t the real consumption of useful capital taking place right now? Menzie Chinn recently alluded to the fact that growth in potential RGDP has probably slowed in the face of a persistent and massive output gap. And I keep reading local news stories about well maintained manufacturing facilities that were highly profitable until just three years ago being torn down because no one expects sufficient demand to come back anytime soon.
This reminded me of just how short the useful life of many so-called “capital goods” really is. Think computers. Or factories. Or even stadiums and basketball arenas. They actually tear down perfectly good arenas that I recall being touted as new and modernistic in the 1970s. (Meanwhile the Roman Coliseum is still standing.) In contrast, my house is 90 years old and perfectly fine. Around me are many houses 100, 150 even 250 years old. All still in good shape. All still producing housing service “output.”
Suppose you were a central planner, deciding what America should do in 2002 to keep people busy (idle hands are the devil’s workshop.) Business investment is out because of the tech crash. Two percent of Americans can feed us all. It used to take 30 percent to make manufactured goods, but even without imports we’d need a far lower number today due to technology. Soon only about 5% of Americans will be able to produce all the manufactured stuff we need. Most Americans already have the refrigerators and washers and cars they want. If I were a central planner, I suggest two uses of labor; more houses and more fun. People love nice houses with granite countertops (when I remodeled in 1997 I put in formica, and I bitterly regret it every day of my life.) We all see pictures of dream houses we’d love. And if we have the things we need, then more services. Restaurants, hotels and hospitality. Service jobs. More houses and more services would seem to have been the best way to keep people busy and boost living standards after business investment crashed in 2002.
It boggles my mind that so many people wring their hands that we might have built a couple of million too many houses over a few years, in a country with 120 million units. In the grand scheme of this does it really matter all that much if a house built in Phoenix is only occupied for 145 years of its 150 year life, instead of 150 years of its 150 year life?
Some would say “what about the banking crisis, the recession?” What about them? Yes, those are the big problems we should worry about. But they have little to do with building a few too many houses. Those failed mortgages were mostly re-fis, as people used their houses as ATMs. Or mortgages on the purchase of existing homes. The losses to the financial system from people not paying back their mortgage on a newly-built house are way too small to explain the great financial crisis of 2008. And I already showed the housing slump doesn’t explain the recession, as it occurred way too soon.
It seems like the misallocation of capital into housing construction was a disaster. Actually it was a minor problem that was correlated with two major disasters, horrible mis-regulation of our financial system that allowed risky loans with tax-insured dollars, and really bad monetary policy that allowed NGDP expectations to fall sharply in 2008.
Those are some really nice new houses out there. Now let’s print some money so that people can enjoy them. (But only enough money to get proper NGDP growth, not enough to bail out all the bad investments.)
Tags:
20. January 2011 at 22:57
I think that “printing money” won’t much help (by itself) because that won’t necessarily distribute the money to the households who might spend it. Unemployed folks have a hard time (at least now) getting a mortgage at any interest rate.
There is “Bryan’s Positive Shock” proposal (probably inflationary) that says you give *everybody* some “bonus for being alive” immune to all taxes. Say $1000 per head. In many households that will retire a lot of debt, which helps remove the overhang. In others, it will generate current demand. (I’m sure there are lots of more sophisticated proposals.)
But the key thing is to remove the banking system from between the Fed’s printing-press and the citizens. And to remove credit-worthiness, employment-status, income-tax-status, and a host of other barriers from between the printing press and the population.
Stimulus that is absorbed entirely by public unions, or Chinese imports, isn’t very efficient. And it’s slow.
(I’m mostly a conservative sort, so I’m sure I have mechanical details wrong, since this is kind of a leftist proposal.)
21. January 2011 at 02:27
Scott,
I’m sure I understand. If you acknowledge ‘horrible mis-regulation of our financial system that allowed risky loans with tax-insured dollars’ then doesn’t that imply resource mis-allocation in favour of the housing that the risky loans were used to finance?
21. January 2011 at 02:29
I actually meant to write I’m not sure I understand. Or even, perhaps, I’m sure I don’t understand!
21. January 2011 at 05:37
If the overbuilding of houses doesn’t matter, then you shouldn’t need to recommend the redistribution of the nation’s wealth in order to pay for it.
21. January 2011 at 05:46
Scott, seems like you always hear that these newer houses weren’t built right, compared to older homes like yours. This could be a myth (ala America doesn’t manufacture anything anymore), but if there is some truth to it then those home in Phoenix might not last 150 years.
Personally I assume the comment is half true, that every generation built X fine homes and Y crap homes. Over time Y decreases because, you know, they’re poorly built. This leaves us with mostly homes from set X, which are – by definition – well built, causing people to say “look at how well these home built in the 30s are”.
ANYWAY, my point is that some percent of these homes built in this recent upswing will not last and maybe should be considered consumption goods (like stadiums) instead of capital goods (like your house). If, as people claim, homes built in the past decade are more Y-style homes, then maybe we built too many indeed. This doesn’t refute your argument, just modifies the initial statement to “we built too many *crap* houses”.
I do live in a townhouse built in 2006 and it seems well made to me, so who knows?
21. January 2011 at 06:39
I don’t agree with your hypthesis in your last post that we did not build too many house(as I explain in a comment there). I do, however, agree with the larger theme here that even if too many houses were built or were built in the ‘wrong’ places that can’t by itself plausibly explain or excuse our current economic situation.
I am interested in your reaction, if any, to this Fed letter. Too me it indicates a real case for AD increase:
http://www.frbsf.org/publications/economics/letter/2011/el2011-02.html
21. January 2011 at 06:51
We’re now 2 years and 3 months past the greatest monetary policy disaster since the great depression, and I’m starting to wonder if the economy is ever supposed adjust to the new money supply.
In the Depression you had the gold standard and bad Fed policy working throughout the first years to keep kicking the economy while it was down. But I’m having a hard time seeing how that’s happening here. My understanding, which comes entirely from your explanation, is that monetary policy was awful in late 2008, but since then not much new has happened.
Doesn’t a bad monetary shock ever go away?
21. January 2011 at 07:15
I once lived in a 150 year old house. The interior walls were a foot thick, I could sit on the windowsills, and the house was made of (mostly) granite. I suspect that most of the homes built in Phoenix won’t last 150 years without significant maintenance. Yes, some are better quality than others, but most are wood frame homes with facade exterior and drywall interior.
21. January 2011 at 07:41
Bryan, I’m not leftist, and it’s not a leftist proposal. I am not talking about giving anyone any money, just boosting NGDP.
Winton, Of course it does. I’m not denying that. I’m saying it made sense for us to build a lot of houses after 2001. It made sense for us to have really low rates that encouraged housing construction. It didn’t make sense to give out sub-prime loans with tax-insured dollars. I agreed in the previous post that we may have built a few too many homes in that period. But in any case there should have been some sort of a housing boom, but driven by low rates, not sub-prime loans.
Josh, I didn’t say over-building didn’t matter, I said it didn’t matter very much. And I certainly never recommended re-distributing wealth, I said keep NGDP growing at a stable 5% rate with good monetary policy.
MikeMcK, I think the houses of the 1950s-70s were crap, but they are getting much better. My mom has a fairly new house in Arizona, which is moderately priced, and extremely well built. I think it’s typical. It’ll easily last 150 years.
OGT, I think it’s likely we did build a few too many. My point in the previous post is that the surplus should have been absorbed by now. But falling NGDP prevented that.
I agree that some were built in the wrong places–a mixture of the sub-prime fiasco and falling immigration from Mexico.
I agree about that SF Fed letter.
William, Good question. I am not just saying awful in 2008, it was awful in 2009 and 2010, just less awful. We need greater than 5% NGDP growth to catch up for the shortfall, and are getting less than 5%. So after wages adjust downward, we need even more downward adjustment relative to normal raises. But I also think the problem is partly supply side. 99 week UI and 40% minimum wage increase has limited wage flexibility. W/o those policies nominal wages would have fallen faster, and the 4% NGDP growth might have been 4% real and 0% inflation, instead of the 3% real and 1% inflation we got.
But it’s a good question, and I’m not sure my answer is completely convincing. BTW, in 1983-84, NGDP grew 11%/year in the first 6 quarters of recovery, vs only 4% this time. Money is still too tight, but getting slightly better.
Dan, I don’t agree, see my answer to MikeMcK.
21. January 2011 at 07:51
I thought we built too many houses because the housing market was down so much and banks were going bankrupt. Even if you had shown that the bank crash was entirely monetary policy the tremendous fall in the housing market shows that those five years of occupied housing are a big deal doesn’t it?
I also don’t think you’ve shown tha the housing market was irrelevant. The XLF was down considerably from summer 07 to summer 08. And that’s with the fact that everyone assumed the big firms would be bailed out. That guarante is hard to quantify but probably worth a lot. I think that what you have shown is that monetary policy could have compensated for the housing crash or created a bank run on it’s own. Am I missing something?
21. January 2011 at 08:55
This is superb analysis by Scott Sumner.
Years ago I worked in the S&L industry (1970-80s). Back then, the demographics said we should build 2 million units a year. And we had not anticipated as much immigration as there has been. Families may be smaller than we thought. But that was the Holy Grail–we had to build 2 million units a year to keep America houses. we never did.
You see adjustments all around–warehouses and old offices converted to housing, even churches. In California, there is a large desert community of camper trucks. People live in their camper trucks permanently.
Add to the picture that much housing stock is not where people live anymore, ala Detroit, or simply is way substandard. That we have “too much” housing–I am not sure about that. Even add homes that are second homes, but still unavailable to people who need their first home. As I recall, the McCains had 14 homes. Evidently, they were not rented out–they just liked having homes to relax in.
I still wonder about treating housing as “investment,” as it does not boost productivity. Even a new computer, to be tossed out in a couple years, boosts output enough to be considered worth it by the buyer.
21. January 2011 at 09:02
right now a lot of those overbuilt houses are uninhabited… this does made them deteriorate. so all these houses do not add to capital stock, but are ‘consumed’, at no value at all.
21. January 2011 at 09:36
Ben Cole — back in the late 1970s-early 1980s when the baby boomers were the driving force behind household formation there was sufficient household formation to absorb some 2 million plus new homes every year. But in the first decade of this century household formation implied that we should have been only been building some 1.1 -1.2 million new housing units each year not the some 2 million plus we actually built.
If for three years we built about a million more homes than household formation justified –about 50% — it implies that for several years we have to hold home building below the some 1.1 to 1.2 million household formation created the real demand for. We now have several years inventory being drawn down very, very slowly and this dampens the basic demand for new homes.
Maybe this excess inventory of unsold homes is a major reason that nominal GDP is running less than the 5% rate Scott believes monetary policy should target. Maybe this implies that it is not as easy for the fed to achieve the 5% nominal growth his theory calls for. May be it takes more than the Fed announcing a 5% nominal GDP growth target for the actual economy to achieve that target.
I could say the same thing about autos. We were consuming 15-16 million new autos at the peak and building some 12 million domestically. Now we are consuming some 12 million new cars and importing 3 million — imports were 4 million at the last peak. This means the demand for new domestically built cars is 9 million compared to 12 million at the last cyclical peak. Moreover, we no longer have the capacity to build 12 million cars domestically. Would the Fed announcing a target of 5% nominal GDP growth magically generate a demand for 15 million new cars in 2011 any more than a zero fed funds rate will? Why?
I have no trouble with your theory that the fed target 5% nominal GDP growth. But I completely fail to see how it would make any difference. Can you explain how the Fed announcing a target of 5% nominal GDP growth would cause the excess housing inventory to disappear or make demand for new cars bounce back to 15 million units in 2011?
OK, the economic rebound could be outside of the housing and auto sectors. But why and where?
21. January 2011 at 10:08
spencer,
You wrote:
“We now have several years inventory being drawn down very, very slowly and this dampens the basic demand for new homes.”
Actually OGT posted a very interesting link on household formation in the previous blog entry. It shows that household formation in the 2000s was 12.7 million. Add to that houses that needed to be replaced because of destruction, and second homes (for rental purposes if you’re entrepeneurial like Scott), or 14th homes (if you just like living high on the hog like John McCain) then it’s not hard to arrive at an estimate of about 1.5 million needed annually in the 2000s. The excess output couldn’t have been very much and has either already been dissipated, or will be quite soon. The excess inventory we have now is much more likely the result of a three years (and counting) of depressed NGDP.
And you wrote:
“OK, the economic rebound could be outside of the housing and auto sectors. But why and where?”
It will be wherever we get the greatest marginal benefit relative to marginal cost in aggregate (plus some give or take for comparative advantage). Are all your needs/wants satisfied?
21. January 2011 at 10:11
Think economically, rather than in terms of bulk aggregates.
We build too many homes people couldn’t afford …
(Apply the the water / diamond paradox to the housing market.)
21. January 2011 at 10:36
Nix the housing for rental purposes. Obviously a household is occupying it. (Anyway, that was mainly to get a jab at Scott.)
21. January 2011 at 11:30
One big problem I have with your analysis is that you don’t consider housing prices. You are not concerned with whether housing has a high price or not. You only care about number of houses built. But the cost of complying with regulations, cost of land etc these factors are all important. The key question isn’t whether we built too many houses. That is a stupid question. The key question is whether we built too many unaffordable, uneconomic, costly houses in bad locations.
I am also not sure why land-use regulations are never considered as a factor in these debates. After all what distinguishes bubble regions from non-bubble regions … land-use regulations.
21. January 2011 at 12:25
Spencer-
Yeah, I am out of date. But then, who knows how many millions of immigrants came in? Some say it was 1 million a year, in the good times.
21. January 2011 at 12:51
Completely relevant point! Either way you look at the data, there was not real oversupply of housing in the USA as whole in 2002. I looked at three sets of data here. 1. Existing one-family home sales inventory (data available from National Association of Realtors) as a % of US population was close to the lows ever in 2002 (data available since 1982). It subsequently rose to the highest level in 2007 before plunging but at the moment it is still above both the average for the period as well as the level in 2002; 2. US housing starts (data available from US Census Bureau) as a % of US population was about at the average level in 2002 (data since 1960). It subsequently rose to a high in 2005 (but even that high was way below the highs reached in the 1970s before plunging to record lows now – the level now i probably something like a 2std away from the average for the period; 3. Private housing building permits (data again from US Census Bureau) as a % of US population – very similar picture as housing starts with peaks and troughs pretty much coinciding. The bottom line is that prof Sumner is right – there are no indications in the data that there was an oversupply of houses in the USA in 2002.
21. January 2011 at 12:54
Greg writes:
“Think economically, rather than in terms of bulk aggregates.
We build too many homes people couldn’t afford …
(Apply the the water / diamond paradox to the housing market.)”
I agree with Greg (uh oh). A house is not a perfectly fungible unit. Consider the following, beginning in 1984, square footage per house increased dramatically from 1,600 to nearly 2,300 by 2007. It then declined sharply over the last couple years.
http://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf
Simultaneously, median incomes remained somewhat limited, such that proportion of income spent on rent increased. You can tie this to huge govt. deficits that began in 2004 if you want, or the mortgage interest deduction, or whatever, but the trend is real. Simultaneously, family size dropped and the population aged. Houses were being purchased on leverage, as an “investment”, on the supposition you should buy as big a home as you could afford since it was free consumption (or even consumption with a financial return). Given that, it’s quite clear that we had an excess of consumption that built up over 20 years, beginning in about 1984 (aka, at the time when the US decided to maintain a strong dollar by spiking the debt/GDP to 40%, and declare “Morning in America”).
Ssumner’s story also misses another key aspect of the housing market in the 2000’s – unit conversion and upgrading. Although units being built only increased slightly, units wre being condoized rapidly (and gentrified), often putting prices outside of the range of median incomes in local areas, and radically expanding units available. I can’t easily find the data to characterize this, but the trend has been obvious. Thus, what ultimately matters was the change in available stock, which has been increasing more rapidly than simple build rates.
As much as I agree with Scott’s NGDP targeting views, 2008 was a welcome attitude adjustment for America. The problem was the debt overhang vs. asset price levels.
It’s possible the overall demand for “shelter” is constant, but the demand for “housing” is not. But ssumner presumes this is because of a general AD drop, rather than a change in perceptions of or preferences for _types_ of housing. The AD problem consists in the fact that if there’s a preference shift in _types_ of housing, we should see accelerating new construction in smaller/efficient units. So that part is the AD problem, although even that doesn’t account for demographic shifts and phenomena like Baby Boomers en masse deciding they don’t have the time/energy to maintain that second house, nor does it account for the speculative demand that occured in in the 2000’s.
So for housing narrowly (although, possibly also in auto manufacturing), I’d argue for a higher % structural. However, it was clearly the job of monetary management (via AD) to accelerate the structural changes, not slow them down.
21. January 2011 at 13:00
Also, scott, why are you comparing the trend from 1984 through 2000 to anything? These were peak home buying years for the boomers. From 2000 on, we should have seen the Boomer trend partly reversing, but instead it did not – speculative demand, preference changes, and second home demand _accelerated_ an industry that should have been consolidating.
21. January 2011 at 13:13
StatsGuy, no need to fear sweet reason.
“I agree with Greg (uh oh).”
21. January 2011 at 13:16
Trust me.
I live in Ladera Ranch, CA — “Zombieland”
I’ve known dozens of people who bought more house than they can afford.
I’ve known dozens of others who took out 2nd mortgages they couldn’t afford to take.
1 in 10 here in Zombieland are currently behind on their mortgage.
And my ZIP is the #1 foreclosure zip in all of Orange County, one of worst housing boom-bust counties in America.
Mao would have forced all these macroeconomists to do a year or two in the fields .. doing field research.
21. January 2011 at 13:28
You know, when I read your first post, about building all those houses, I kept thinking to myself, “Damn, he’s not talking at all about the fact that houses last forever. The total numbers we’re talking about could easily add up to a signifcant surplus when you consider how durable housing is”.
Then, you addressed durability in your second post (this one), but didn’t directly address how it ties into whether there’s an excess in housing. Most of those houses built in 1978 should be serviceable.
So what we should really care about is the rate of new housing verses the rate of household growth (plus the rate of
destruction of homes that are no longer livable).
Doesn’t it seem odd to you that the rate of new housing construction is roughly constant despite a growing population? The obvious point I draw from that is that housing is becoming more durable, not less.
So then I went an looked at some raw data… how many new households are there?
New Homes New HHs Excess
Total (78-09) 44,000,100 36,405,000 17.3%
2000s 15,363,500 13,307,000 13.4%
1990s 13,713,600 11,044,000 19.5%
1980s 14,923,000 15,500,000 -3.9%
(Hope the formatting comes out right on that). This suggests that, if anything, there was likely a housing shortage in the 80s, as there were more households created than households.
In the 90s and 00s, there were significantly more houses built than there were new households created.
What I have no idea about is the rate at which old houses become unlivable. The excess in the 90s and 00s works out to something on the order of 200-250k houses a year beyond what’s necessary to house new households. That strikes me as a feasible number to more or less be due to old homes falling apart, fire and loss, and whatever, but it could also be a decent amount too high. So it could be a surplus. It could also not be.
Another thing I haven’t seen commented on, is that I think your assumption that a couple years of vacancy might not be a big deal (in the context of a 100 year life expectancy) is pretty far off.
Problem is, a vacant, unmaintained house can quickly and easily become a total loss. Pipes freeze and break, metals are stolen, and in the process, the house can generally be vandalized and wrecked.
21. January 2011 at 13:28
Thomas Sowell discusses the difference between housing scarcity and housing shortage in his book _Basic Economics_:
http://books.google.com/books?id=lhiIyq8ylUMC&pg=PA30&lpg=PA30&dq=thomas+sowell+basic+economics+scarcity+housing&source=bl&ots=52pfZ1xScP&sig=dlGmxSrvnuzbq5fyeg1ihQ9hW3g&hl=en&ei=uvk5TanrMYqesQPdntSOAw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBMQ6AEwAA#v=onepage&q&f=false
And note well.
Many immigrants lived dozens to a house — called “clown houses” by some.
They may have needed, may have desired, more houses, but making their own economic trade-offs, this is how they chose to live.
21. January 2011 at 13:52
1. US new home one-family house average price (US Census Bureau) vs US disposable personal income per cap (BEA) ratio in 2002 was around 8. The all time low before that was 7.5 in the early 1990s (the ratio barely moved between 1990 and 20004. Then it rose to reach a high of 9.5 in 2007. Note, though, that this was LOWER than in the mid 1980s! So the peak in 2007 was not the all-time high. Finally notice that at the moment we are at an all-time low of 7 – you could say that houses are cheap now:-)
2. The Housing Affordability Index (National Association of Realtors) in 2002 was far from being abnormal – you could say that it was close to its highs of around 130 (data since 1989 – the higher the index the more affordable housing is). Then it subsequently plunged to 100 (all time low in 2005 – combination of higher funding rates and higher prices). It has steadily risen since then and right now it is at an all-time high of 184! There was never a better time to buy a house!
Now the “bad” stuff
3. Home ownership rate was at an all-time high in 2002 – close to 67% (US Census Bureau). It rose further to 69% in 2005 and now we are back (unfortunately) to 67%.
4. Financial Obligation Household Debt Service Ratio was already at an all-time high in 2002 at around 13%. It went marginally up to almost 14% in 2008 and we are back to 12% – the level in 2000 which also is the average since 1980.
5. US Ownership Equity in Real Estate (Fed data) – this graph i amazing – you have to look at it. It is a straight line since 1950 from 80% to currently 39%! We plunged from 60% in 2008 to 39% now – 2 years we plunged by the same % as it took us previously 58 years!
6 and 7. Delinquency Rate (Mortgage Bankers Association) and the Vacancy Rate (US Census Bureau) exhibit the same pattern – pretty much flat from 1980 till 2005 and then a massive spike higher (as expected)
8. However, there is a curious data for me – Vacant Houses For Sale (US Census Bureau) – a straight upwards sloping line since 1965! In 1965 there were about 6,000 vacant houses for sale – now there are close to 19,000!
I think it is kind of obvious that there is no way there was any bubble in housing in the mid 2000s. The only bubble out there was the bubble in household debt!
21. January 2011 at 17:24
Scott, they bull-dozed half completed houses in North LA county — it was not worth it to complete, maintain and sell them.
They have left condos in Florida and casinos in Las Vegas uncompleted — they can’t sell them or operate them at a pice that covers costs.
This is just what Haykian macro predicts at the turning point of the boom bust.
Funny thing — in this housing example you are recapituling Kaldor’s magic-based argument against Hayek on the topic of forced savings.
21. January 2011 at 17:33
Scott, why not extend the length of all production processes — this would expand the growth of wealth for everyone.
This is the argument for forced savings — and the naive argument for artificially price controlled (low) interest rates.
The answer is an economic argument involving choice trade-offs which have been blackballed from academic economic discussion — because the economics can be done in the logic of choice, but not in mathematically tractable form.
21. January 2011 at 18:20
E, No, banks did not go bankrupt from issuing lots of mortgages on new homes. The largest number of bad mortgages were re-fis and mortgages on the purchase of older homes.
In any case, the real problem for banks was sub-prime mortgages, not too many homes. Yes, sub-prime mortgages contributed to the housing boom, but so did very low rates.
You said;
I think that what you have shown is that monetary policy could have compensated for the housing crash or created a bank run on it’s own. Am I missing something?”
I’ve never argued monetary policy should compensate for the housing crash, I favor a stable monetary policy of NGDP targeting, whether there is a housing crash or not. If they had done that, we still would have had the sub-prime fiasco, but not the severe recession. And we wouldn’t have 19 million vacant units.
Benjamin, Those are good points.
It is investment, because it generates a stream of output. What you mean to say is that it is not R&D, which boosts labor productivity.
Jaap. Obviously they have value, try buying one for 10 cents. Their value is their price.
Spencer, You said;
“Maybe this excess inventory of unsold homes is a major reason that nominal GDP is running less than the 5% rate Scott believes monetary policy should target. Maybe this implies that it is not as easy for the fed to achieve the 5% nominal growth his theory calls for. May be it takes more than the Fed announcing a 5% nominal GDP growth target for the actual economy to achieve that target.”
Maybe, but I don’t see a shred of evidence to suggest this (checkout QE2’s effect on markets) nor is there any theoretical reason this would be true.
I doubt household formation was any lower than the 1990s. Why would it be? And why were vacancies so much lower in 2006 than late 2010?
You also misrepresent my position on NGDP targeting. I am not claiming that we can instantly restore full employment. But I don’t doubt that over a couple years we could scale up auto production quite a bit. There’s lots of excess capacity in autos.
You asked:
“OK, the economic rebound could be outside of the housing and auto sectors. But why and where?”
Whatever people want. That’s for the market to decide.
Mark, I agree. Until I can consume what Donald Trump consumes, I won’t be satiated. I don’t yet have a mansion in Beverly Hills with servants.
Greg, Yes, but why hasn’t the excess supply of homes been absorbed over the past few years? A weak economy?
assman, I have other posts discussing land regs and prices. Obviously high “house prices” are actually high land prices. That’s a given. And that’s due to zoning and other regs.
Anton, Thanks for that very interesting data. It sounds plausible to me.
statsguy, You said;
“Simultaneously, median incomes remained somewhat limited, such that proportion of income spent on rent increased. You can tie this to huge govt. deficits that began in 2004 if you want, or the mortgage interest deduction, or whatever, but the trend is real.”
First, that’s flow supply, so it only has a small impact on average size of the stock. Second, it’s what you’d expect with very low real rates. Housing is more affordable, and so people buy more. It makes sense for us to build something useful like houses, which people enjoy, when we didn’t need more computers/fiber optic lines, and all sorts of other high tech stuff that was overbuilt.
You said;
“Ssumner’s story also misses another key aspect of the housing market in the 2000’s – unit conversion and upgrading. Although units being built only increased slightly, units wre being condoized rapidly (and gentrified), often putting prices outside of the range of median incomes in local areas, and radically expanding units available. I can’t easily find the data to characterize this, but the trend has been obvious. Thus, what ultimately matters was the change in available stock, which has been increasing more rapidly than simple build rates.”
I don’t miss this story, this is exactly my point. It’s good to upgrade our housing stock. If Martians offered to replace every house in America with a mansion (say energy efficient) would you turn them down? Yes, there was a period where builders misjudged the market and built a few too many nice homes and condos. But the housing boom itself was a really good idea, we just went a bit overboard because the the government’s foolish decision to promote sub-prime mortgages, something the Obama administration is continuing to do (and the GOP would probably do as well.)
You said;
“As much as I agree with Scott’s NGDP targeting views, 2008 was a welcome attitude adjustment for America.”
Not for the millions of unemployed. It might have had a silver lining if the Federal government stopped sub-prime lending, but they now subsidize it.
Regarding smaller units, there are plenty of small rental units available. If 20-somethings can’t even afford them, they certainly can’t afford newly-built condo studios.
Regarding boomers, the US birth rate bottomed out in 1974, then rose substantially. So the number of young adults should have been rising in the 2000s (and right now for that matter.) Immigration has also soared compared to the 1960s and 1970s. Ditto for second homes.
Greg, I agree people bought homes they couldn’t afford. I’m a big critic of sub-prime mortgages.
MikeDC, That excess is easily absorbed by two factors. One is depreciation, as you mention. Even more important is rising second home ownership. Indeed many homes in the US are bought by foreigners. Latin Americans buy condos in Miami, etc. I think 1.5 million per year is a reasonable “normal.” We need one million for pop. growth (assuming 3 person households, and the other 500,000 is second homes, foreign homes and depreciation.
Greg, I agree that immigrants often live in crowded houses.
Anton, That’s quite interest data. By the way, I don’t care if the homes are owned or rented, I just want them to be occupied. It seems a waste to leave them empty, and as people pointed out empty homes do deteriorate faster. (But unless in some place like Detroit, they usually don’t become worthless.)
21. January 2011 at 18:22
Greg, You keep bringing up these arguments without explaining how they have any bearing on my argument. I don’t see any.
“Scott, they bull-dozed half completed houses in North LA county “” it was not worth it to complete, maintain and sell them.
They have left condos in Florida and casinos in Las Vegas uncompleted “” they can’t sell them or operate them at a pice that covers costs.”
21. January 2011 at 22:25
“I’ve never argued monetary policy should compensate for the housing crash, I favor a stable monetary policy of NGDP targeting, whether there is a housing crash or not.”
BLAH, BLAH, BLAH.
Dude seriously, you only talk about printing money and DeKrugman.
IF 50% of your message was what it takes to have stable monetary policy when times are getting good, and a brutal Fisking of any neo-liberal who argued for Government spending – namely public unions.
THEN you would be honest.
Scott, ASK YOURSELF why some many people don’t understand your idea?!?
It isn’t complicated:
piss on booms
print when things get tight
Ultimately your argument is monetary Keynes, EXCEPT you don’t mention #1 enough for people to get you are still a free market guy.
So you say all this free market passive-aggressive stuff, but nobody gets that deep down you are crypto-capitalist who wants kill fiscal stimulus, and keep banksters from having big booms.
SAY IT!!! Let out your inner scold, explain how if you were in the Fed, you’d have told Bush if he let the $500B in pay raises happen for public employees you’d have RAISED interest rates.
That’s YOUR position: the Fed reacts to fiscal. They read the riot act to Presidents – like Greenspan did with Obama.
Show us the final card where the Fed RUNS THE SHOW, and NEVER lets things go to hot.
Because that’s your argument, IF they won’t piss on booms, no matter what the politics, no matter what the unions ask, then your shit doesn’t work.
I feel like Sam Kinison:
http://www.youtube.com/watch?v=Xfi4s8cjLFI#t=01m58s
C’mon Scott, SAY IT!
21. January 2011 at 22:27
er Clinton.
An F-slip.
21. January 2011 at 23:06
Morgan chill, who the hell is he going to say it to? The angries aren’t reading this blog. Most of Sumner’s support is on the liberal side, why don’t you go get the conservatives riled up, or at least up to speed. And then, when election time comes, it all works out Sumner for the moderates, and vindictiveness over public employees for the hard core.
21. January 2011 at 23:45
hi Scott,
I understand your rebuke, in general just get title to a home without an exchange of money, but I based my comment on this article:
http://articles.chicagotribune.com/2011-01-13/news/ct-biz-0113-walkaway–20110113_1_foreclosure-process-foreclosure-filing-servicers
Basically, in some ‘hoods in Chicago, banks are walking away from homes. They did the math and don’t think they’d make money selling these homes after all costs.
Does an object with costs higher than the resale value after maintenance has value? I’d argue no.
21. January 2011 at 23:53
Scott, the point is that there are trade-offs to be made when people attempt to lengthen the time structure of production (e.g. via new housing construction), I.e. this effort has costs and must be paid for — and it may be revealed that no one is willing to pay this cost, make these trade offs.
You refuse to address the issue.
Why?
22. January 2011 at 05:34
Greg,
If you want to talk about logical deduction, could you answer me a question about the Austrian business cycle?
You could say I was “brought up” in the Austrian tradition, but I’ve never really bought the boom and bust cycle as a sensible explanation for anything because it inevitably falls back on some claim of absolute valuation. That is, “we build too many homes people couldn’t afford”.
Whatever inventory we’re talking about in the boom cycle, we did, in fact, build it. So “couldn’t afford” to do it is a nonsense statement in the literal sense. We can’t produce outside the limits of our production possibilities.
In the more figurative sense, of course, an Austrian will argue the time-structure problem is a matter of “easy money” fueling the boom. But how is someone to know the difference between a credit fueled, “false” boom, and a real one? It seems to me that Austrians have no sensible model of expectations.
I think of expectations of the future as, largely, a self-fulfilling prophecy. No matter what “fundamentals” you think about, if everyone suddenly gets frightened and believes the future is going to suck, the future will suck. People will stop buying, and excess inventories will develop.
By the language you’re using, comparing choice trade-offs, the ex ante choices are simply not comparable to the ex post choices. What Austrians seem to be arguing is that the ex ante choice was irrational given what happened later. But you can’t know what will happen later. It’s essentially backward looking and one can’t make decisions looking backward.
Like, suppose I decide to build a new house, and put a $50,000 non-refundable down payment on it. Next week, I go to the doctor and find out I’ve got six months to live. Ex post the new information, I’ve made a costly mistake in expectations about my future income. I may regret that decision, and I may not be able to afford the house, or want the house, but that doesn’t mean, at the time I made the decision, it was a “mis-allocation” of capital or that a change in “the time structure of production” was inappropriate.
22. January 2011 at 08:06
“Whatever inventory we’re talking about in the boom cycle, we did, in fact, build it. So “couldn’t afford” to do it is a nonsense statement in the literal sense. We can’t produce outside the limits of our production possibilities.”
There are several things about this statement that show you haven’t grasped the full concept of the ABCT. To begin with the final stage of the boom is described as one in which projects that were started can not be completed due to costs associated with completion. In this sense we really couldn’t “afford” to build these houses because our production possibilities frontier didn’t allow for enough of X,Y and Z to be produced to finish all of these projects that were started.
The second point is that these goods are not free of maintenance. You might say to yourself “how can there be to many condos in Vegas- I would love a 2nd place there if prices just come down enough”, the reality of the situation is that prices may never actually be low enough to meet your (and by your I mean a price low enough to move a majority of the vacant properties) price simply because owning a condo isn’t free. If the upkeep is higher than the price you are willing to pay these condos have essentially zero value upon completion. Scott misses this very badly when he writes
“It boggles my mind that so many people wring their hands that we might have built a couple of million too many houses over a few years, in a country with 120 million units. In the grand scheme of this does it really matter all that much if a house built in Phoenix is only occupied for 145 years of its 150 year life, instead of 150 years of its 150 year life?”
A house that sits vacant for the first 5 years of its existence doesn’t have a 150 year life expectancy. It has a 5 year life expectancy. Between animals, mold, weather, vandals and vagrants the value of a house drops very quickly when it becomes unoccupied, and eventually has a negative value as demolishing it is a better idea from a cost standpoint that running the risk of it damaging the property of others via fire, infestation or general collapse.
22. January 2011 at 10:32
Jaap, I doubt those are new homes.
Greg, Because I don’t understand the relevance to this post.
Tom, If what you said about depreciation on new homes in Vegas was true, the homes would have zero market value. Are you telling me I can buy perfectly good homes for nothing? I was just in Tucson, and a new typical home is around $200,000—they aren’t worthless. I’m sure Phoenix is a bit less, but still valuable.
22. January 2011 at 11:35
Scott
No, you cannot buy a perfectly good home in Vegas for nothing. The reason is that the houses that have sat vacant for 5 years on average are not perfectly good homes (I admit that my statement above is hyperbole, a home that is vacant for 5 years is not automatically worthless, but a home that sits for 5 years has a much lower average life than 150 years), they are home that have one of several problems with them.
1. Vandalism/Vagrancy- pretty self explanatory
2. Stupidity- ie: forgetting to turn off water results in a burst pipe (not a problem in Vegas in all likelihood, but other leaks can happen).
3. Nature. Mold, termites, animals- things that an occupant would notice and re-mediate can fester and destroy the value of a house.
4. Lack of neighbors. This is the big one in Vegas, and probably in parts of Arizona as well. One vacant condo in a building is not a problem, one filled condo in a building is a problem. That one condo owner has to pay for the entire building’s upkeep, which is untenable.
The buildings in Vegas, Florida and Arizona that have zero or near zero value are not “perfectly good” by anyone’s definition. The condo’s in empty buildings (after the building has been empty for a certain period)are rarely listed. Why? Because it is virtually impossible to find individual buyers who would occupy enough of the building this way. The buildings are sold as one unit- but frequently stand empty for years and their final sale price is many thousands to hundreds of thousands to millions of dollars lower than the cost to build and then to maintain in salable condition in the interim. Sub-developments- like those that were common in Arizona are less extreme since the shared cost is more heavily weighted toward things like sewage, roads and electricity which are infrastructure based and take years to decay (which means you have longer to fill the development), but you still have to pay extra or go without, police and fire protection, trash services, busing for schools, while traveling further for groceries, work etc.
For a clear example of these principles see Detroit.
22. January 2011 at 11:38
PS.
Did you know that in all likelihood your insurance policy has a section that describes what you have to do if your house is unoccupied for 30 days or longer? If you go on vacation for more than a month you are required to tell your insurance agency and pay for additional coverage. If you are a landlord you have to agree to checking on the property at intervals (every two weeks is common) and perform security checks. The difference in policy costs is not trivial and is indicative of how much potential damage can occur to an unoccupied home.
22. January 2011 at 13:16
scott
you said:
I’ve never argued monetary policy should compensate for the housing crash, I favor a stable monetary policy of NGDP targeting, whether there is a housing crash or not. If they had done that, we still would have had the sub-prime fiasco, but not the severe recession.
That pretty close to what I meant. I was trying to say that youd shown monetary policy could have kept the fall in housing prices from becoming a recession, but not that the fall in housing prices did not significantly contribute to the recession. Commenting from work on a phone I probably should have been more careful to be clear.
Your other point is fair enough, if banks didn’t lose much money on building new houses then it wasn’t such a big deal. But doesn’t that just shift the charge to “invested too much in the housing market” does it matter exactly how they lost so much money?
Also this seems picky, but if there is a somewhat rundown house in a potentially high priced neighborhood and we build it up so that it is now high end housing should we look at that differently from building an entirely new house? I don’t honestly know if that represented a lot of the construction in the mid decade but it seems plausible to have a housing bubble where every low price low quality house is upgraded.
Thanks for the response.
23. January 2011 at 04:04
Scott,
It’s nice to see someone point out what should be obvious, which is that the more productive we become, the more we can consume. This simple fact seems lost on the media and many in Washington who seem indicate we have declining standards of living, and using consumption/GDP figures and the rise of the service sector as evidence.
The US is in great shape, other than the self-inflicted sub-par AD.
23. January 2011 at 15:23
What if instead of a couple million, we’re talking 20 million (see number of housing units vs number households). 20M * 250k average price is $5T of capital misallocated. That’s real money.
Also, whenever one talks about the misallocation of capital, you have to consider what else that capital could have been deployed for. How about improving the US infrastructure. Paying down debt instead of ‘returning the surplus to taxpayers’? Had debt been decreased as Clinton put us on the path towards, there would have been more wiggle room for Obama to use fiscal policy (either tax cuts or spending…Republicans who claim to be against using fiscal policy to stimulate the economy are liars).
The nature of the overbuilding also makes the problem very very bad in some areas, while much less bad in others. So we have nearly intractable problems in some areas, which makes government responses far more difficult, to execute and to sell to taxpayers.
23. January 2011 at 19:53
Tom, I thought that houses in AZ doubled and them fell in half. They’re not worthless, just what they were worth in 2002. Is that wrong?
I agree about Detroit, but that’s an outlier, and not an important part of America’s housing market in value terms.
A developer in the Southwest who built a $200,000 house (construction cost) expecting to see it go for $400,000, and then finds the market is back to $200,000, should sell it for $200,000 not let it rot to zero. But maybe I’m missing something.
e, It was mostly re-financing–that’s what I meant.
Thanks Mike.
Jim. You said;
“What if instead of a couple million, we’re talking 20 million (see number of housing units vs number households). 20M * 250k average price is $5T of capital misallocated. That’s real money.”
Yeah, it would be. But it’s only a couple million, not 20 million, so in fact it’s not a big deal.