Housing Boom / Housing Bubble

Be Warned: Mr. Bubble is Worried Again by David Leonhardt (August 21, 2005)

Robert Shiller's graph of housing prices ending in 2005 or so.

This post is sort of free-floating working-out of my ideas on the issues. The context of this is series of back and forth blog posts between Matt Yglesias and Doug Henwood. Yglesias's first post is a reaction to a piece by Jeffrey Sachs published in the Huffington Post. Right off the bat, I'm distrustful of Sachs and more trusting that Yglesias will be correct. They're both liberals so they both want the same things or ends, but Sachs can be all over the place and became famous after putting the Russian people through the wringer via "Shock Therapy." My view is that he had sort of a crisis of conscience over the experience and became more liberal if not really that rigorous in his thinking. I could be wrong. Also, Huffington Post will publish good stuff, but also will run hokey stuff. So my BS detector is on high alert. Anyway Sachs writes:

The housing boom between 1998 and 2008 was an indirect reaction to the loss of manufacturing. As the US shed manufacturing jobs in the 1980s and 1990s, the Federal Government and Federal Reserve tried to compensate by boosting jobs in construction and other sectors shielded from international competition (so-called non-traded sectors). The Fed cut interest rates and the White House and Congress promoted housing finance, including through reckless deregulation and irresponsible behavior by government-backed entities like Fannie Mae. These efforts produced a temporary boom in housing, followed by the bust in 2008.

Obama and his advisors have believed, in effect, that they can reignite the housing boom. Rather than reacting to the underlying problem -- the loss of manufacturing competitiveness -- they have acted as if a bit of pump priming and the passage of time will recreate consumer-led growth in housing, autos, and other sectors.

Yet this approach has been doomed to fail, and continues to do so. Consumers will not return quickly to buying houses, cars, and other big-ticket items in large numbers. They are exhausted and in debt, and in no mood to repeat the earlier disasters of over-borrowing.

Ygelsias argues there wasn't a boom in housing, but a boom in prices or a bubble. Doug Henwood responds to this. He's usually pretty good, but can bitchy towards others like Yglesias. Henwood's response is that there was a boom, along with a bubble. A bubble starts with a boom and then takes on a life of its own. And then as far a I can tell Yglesias responds and agrees there was a boom but that it wasn't that big. Henwood says it was pretty big:

To reprise a couple of points from yesterday’s post: 1) As a share of GDP, residential investment—that is, the building of new houses and work done on older ones—hit a peak of almost 60% above its long-term trend in the mid-00s. And, 2) between 2001 and 2006, residential investment accounted for 12% of GDP growth, twice its share of the economy. If “60%” and “twice” don’t sound like big numbers, then I don’t know what does.

See where I'm confused is where inflated prices work into the equation of residential investment. Is the bubble reflected in the numbers? And when working with fractions and percentages it gets kind of tricky. My guess is that Yglesias doesn't want to admit there was a boom of any sort in the Bush years, but maybe that's not fair or true.

Calculated Risk* has had some interesting posts on the housing market. The construction industry builds a certain number of houses a year to keep up with new housing formation. Because of the crisis and bust, there's a big overhang of available housing. Once that is worked through, which will be slower than the past because of a slowdown in household formation, the construction industry will start building again to meet demand and create jobs and more demand. New construction won't be at the boom level of the past though because there won't be the boom level of demand in new housing formation. Dean Baker repeatedly points out at his blog that housing prices need to come down to their trend before the market can turnaround. I admittedly don't have a handle on it.

But back to Sach's long history. It interesting that Sachs says the boom is from 1998-2008 whereas Henwood says 2001-2006. There was an Interent bubble in the late Nineties and then a mild crash. Sachs says the US shed manufacturing jobs in the 1980s and 1990s and I guess it's true, although the 1990s had a period of growing wages and full employment during the Clinton years right before the Internet bubble burst. Sachs asserts that the government created the housing boom through design and I don't know if that's quite true. There was the Global Savings Glut which lowered mortgage rates and the Bush tax cuts and the weakening of loan restrictions so that more people could pile on debt. Was this a housing boom policy or more accidental? Growth would have been worse with out these things. I agree that Clinton and Bush both pushed "the American Dream" with more access to housing with the Bush administration probably inflicting more unintended consecquenses.

Sachs says this "artificial" housing boom demand won't be replaced so the Obama administration's "pump-priming" is futile. He argues they need to address the long-term structural problems of "competitiveness" and the loss of demand caused by the loss of manufacturing jobs. Dean Baker has pointed to the trade deficit.

Maybe after priming the economy won't pick back up to its previous boom levels, but after financial crises economies do usually come back (except Japan of course). The world economies came back after the Great Depression but only because of the pump-priming of war time spending and moentary policies.

In sum, I agree that there's a lack of demand because consumers were relying on credit during the boom years and they are not now. Plus the loss of demand cause by job losses and government budget cuts. But it's also the case that the fear caused by the crisis and recession is making credit and spending less than they need be. The Fed and White House pump-priming are trying to get people to be less cautious and help them deleverage. There's no reason why corporations and people with money are sitting on it, demanding safe places to park it and low returns, other than the fact that they are anxious and see years of slow growth ahead.
---------------------
*This might be wrong. It's not that there's an overhang, it's that prices are too high and demand is too low. Anyway I'm confused.