It's (Still) the Housing Crisis, Stupid

More

It's always worth repeating: If you have a question about the weak recovery, the answer comes back to housing. Let's try a few.

Why do consumers feel so gutted? To begin with, a fifth of mortgages are underwater. Half of families aren't personally investing in the stock market. Their sense of future wealth depends on the value of their home. They're much less likely to spend normally when their house feels like a losing investment.

Why is employment growth so slow? To begin with, we don't need any more houses, so we don't need many more construction workers to build them. That's a big deal. "The decline in construction accounts for nearly 40 percent of the total decline in employment between December 2007 and February 2010," the St Louis Federal Reserve found, producing this graph to illustrate the construction industry's drag on employment:


And why is overall investment so horrible? It's still about housing. For one thing, residential investment is 60 percent below its 2005 peak. When the real estate bubble burst, the economy had too many homes and buildings. The St Louis Fed reports that "under these conditions, economic theory predicts investment in structures should collapse (just as observed in the data) and stay low until the desired level is attained (either by natural depreciation or by actively restructuring the housing stock to more desirable uses)." Here's the investment collapse ...

Screen Shot 2011-12-12 at 1.12.49 PM.png

... and here's the graph showing that most of the collapse came out of housing, not equipment and software (even if that's what you tend to think of when you imagine companies investing):

chart

The Republican presidential nominees are often asked what they would do to help the economy, and they obediently respond, one-by-one, that they would like to lower taxes, get the government out of small business's hair, sign free trade agreements, and so on. I'm not against lower tax rates (combined with higher effective taxes), or relaxed regulations for some industries, or more free trade agreements. But these measures have only a tangential impact on housing prices, consumer debt, and families' abilities to get loans to buy new homes. That's the only way to clear our empty inventory, give construction companies cause to hire new workers, and give real estate developers an argument for developing new properties.

The Great Recession is over, but it feels like a recession because the housing industry is in a depression that never ended. We're still making our way through an economy with too little money chasing too many houses.

Jump to comments
Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Get Today's Top Stories in Your Inbox (preview)

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In