It's (Still) the Housing Crisis, Stupid

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 ...

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... 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):


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.