Take a look at Caroline Baum’s article at Bloomberg on the history and sources of the housing bubble, why it’s futile to try to reflate it, and why that’s a problem for the larger economy:
For starters, housing’s footprint is larger than its current 2.4 percent share of gross domestic product. Even at its recent peak in 2005, residential investment, as it’s known in the GDP accounts, made up only 6 percent of GDP, the highest since the 1970s when inflation was driving demand for real assets.
For most Americans, their home is their major store of wealth. The value of household real estate peaked in the fourth quarter of 2006 at $25 trillion, falling to $16.2 trillion in the second three months of this year, according to the Fed’s latest Flow of Funds report. A reverse wealth effect is depressing consumer sentiment and spending.
It’s also limiting mobility. Unemployed homeowners who owe more on their mortgages than their homes are worth can’t pick up and move to areas of the country where labor is in demand.
Finally, home purchases beget spending on big-ticket items, such as refrigerators, washing machines and furniture.
She attributes the bubble to the revision in capital gains taxation in 1997. I think that’s one of the factors as are the Congressional mandate on Fannie Mae and Freddie Mac to produce more homeowners, malfeasance and misfeasance on the parts of both borrowers and lenders, greed, China pegging the yuan to the dollar, fractional reserve banking, the shadow banking system, and on and on indefinitely. My own favorite culprit for the primary cause of the housing bubble is exponential growth. If you expect something, anything, to grow at a fixed (or increasing!) rate indefinitely, at some point serious problems will arise.
However, the key point here is that residential investment will never return to what it was before 2007, at least not in our lifetimes which is a good enough approximation of never for me. The bloom is off the rose. It can no longer be believed that housing prices can’t decline appreciably over a substantial period of time and, consequently, the illusion that housing is a secure, no-fail investment has been dispelled.
We have built an economy around that illusion since the end of World War II and the over-investment in housing has had consequences that will be with us for the foreseeable future not just in the form of the volume of housing stock and, now, lots of unsold houses but in the form of the inefficient use of capital and the other businesses that weren’t created.
Policies aimed at propping up housing values are not only doomed to failure they are counter-productive. We need to try something else.
I hate to Sunday pessimistic, but I don’t think there is much else. We will just need to gradually work through the excess real estate stock.
Steve
The ‘illusion,’ if you will, was that once a person bought a home, they also bought into the idea it would continue to appreciate, providing them with greater equity, as the years passed. It seemed there was little consideration as to market downturns or having to weather financial circumstances beyond their control.
This was a myopic fantasy on the part of many, similar to those expectations of college students who only saw an upward trajectory, once they graduated with a degree in hand.
But, then rose-colored expectations can also be applied to marriage, having children, going on that yearned for magical vacation, retirement, and on and on….Life doesn’t always work out as anticipated, or even when all the right effort has been duly applied. There are simply no guarantees. And, when something doesn’t work out as planned, I see no real benefit in replacing one’s disappointment with bitterness or misplaced resentment towards others, like what appears to be so prevalent in the OWS movement.
Furthermore, the housing market will not be in the position of recovering until most of the failures have been honestly reconciled. As long as government keeps coming in and enabling the market, it will only provide short-term benefits to a few, while extending the suffering, malaise, and unease for all the rest…..making home-buying a precarious, government-managed venture many will shy away from becoming involved in.
“She attributes the bubble to the revision in capital gains taxation in 1997.”
I’ve often thought this was a key variable, becuse it brought in the speculators. Houses became securities.
“I think that’s one of the factors as are the Congressional mandate on Fannie Mae and Freddie Mac to produce more homeowners,…….and on private lenders. Don’t underestimate that.
“malfeasance and misfeasance on the parts of both borrowers and lenders”
Yes.
“greed”
Well, like inflation greed exists always and everywhere.
“China pegging the yuan to the dollar, fractional reserve banking, the shadow banking system”
???
“My own favorite culprit for the primary cause of the housing bubble is exponential growth. If you expect something, anything, to grow at a fixed (or increasing!) rate indefinitely, at some point serious problems will arise.”
I guess this a point of timing. I’ve always tried to point out that there were catalytic events and policies…….and then Katy bar the door. Once the animal spirits take hold…………I sell.