This article comes from First Tuesday Journal Online
This article lists the top nine reasons why housing will not lead the U.S. economy into recovery and critiques the misconception that housing is an economic driver capable of rescuing a failing economy.
Nine reasons for housing’s impotence
The housing industry will not rescue the American economy from what has become a Lesser Depression as it has in so many economic downturns that have come before, according to the Washington D.C.-based think tank, The Brookings Institution. [For the full report, see the December 2011 Brookings Institution article, What’s Wrong With American Housing.]
Housing in these economic doldrums suffers from nine identified deficiencies that render it incapable of jumpstarting the U.S. economy, according to Brookings:
- There is an overall lack of households that are willing and able to buy homes.
- Persistent mortgage delinquencies due to falling home prices, rampant job loss and low-quality mortgage products have arrested home sales volume.
- Stalwart mortgage lenders are piously unwilling to participate in federal programs to smother the ongoing foreclosure firestorm.
- A defective mortgage interest tax deduction (MID) policy that subsidizes wealthy owners of high-tier properties while leaving middle- and low-income homebuyers with little incentive to own.
- The reluctance of local governments to zone for the building of housing for low-income households has led to a surplus in housing unsuitable in size and location for many in the population.
- Homebuilders (funded by lenders) tend to overbuild (and over-lend) during prosperous years under the illusion that strong demand will last forever, leading to a glut of properties on the market when times get tough.
- Hundreds of thousands of individuals and low–income households are essentially homeless.
- Home price metrics (median pricing, comparable sales data, affordability) used by housing industry professionals and reported by the media pundits distort the reality of home prices.
- Lenders have overreacted to the subprime mortgage crisis and are now applying overly stringent standards of creditworthiness (read: FICO scoring) to potential homebuyers.
The economic driver fallacy
There is much in this list to comment on, and first tuesday has written at length on all of these ills affecting the real estate market. The Brookings Institution has done well with this catalog of the reasons why the housing industry will not be a panacea for this Lesser Depression as it has in past recessions. But the important point it fails to make is that housing never ought to be considered an economic driver capable of returning an economy to equilibrium.
This approach to thinking of the housing industry as an economic driver rather than an economic indicator has been the fool’s ploy repeated recession after recession in the U.S. and has in many respects led to what we now know is a pure and simple jobless depression (though of a lesser variety than the Great Depression.
Yes, the housing industry can be a powerful source of job creation (albeit dominated by unskilled and low-wage labor), wealth creation, productivity and thus prosperity. However, and here is the logic, the building and buying of homes and office space is only possible if the economy (read: gross domestic product (GDP)) is driven organically by a widespread production and exchange of goods and services, allowing workers to sustain their shelter over the long term and not just during the virtuous cycle of a recovery. [For more information on the luxury vs. shelter debate, see the October 2010 first tuesday article, Is homeownership a luxury or a necessity?]
Leave real estate in the backseat
When housing is marshaled as the driver of a suffering economy there can be only one avenue to get it there: allowing the maximum number of homebuyers to accumulate mortgage debt at the maximum loan-to-value ratio (LTV). The skillful accumulation of debt can be a good thing for improving one’s standard of living, but as we have seen in the fallout of the Millennium Boom, this debt is all-too-often unsustainable and of a predatory variety.
There are many pushing for the use of the now-latent housing recovery to rev-up and pull us from the murky depths of this economic downturn, especially the all-powerful real estate and mortgage-banker trade unions. This means the fallacious inflation of home sales data, aggressive lobbying for ever-greater homebuyer subsidies and endless cries for lenders to release the perceived death grip they have on cash reserves and start lending boom-time style again. [For more information on the transgressions of the trade union, see the January 2012 first tuesday article, NAR pads the numbers.]
But let us allow this Lesser Depression to work the only magic that it can — a forced return to economic fundamentals, under which a flourishing housing market is an indicator of a healthy economy populated by gainfully employed individuals who can pay for their shelter without subsidy. [For an update on how California is faring in the jobless Lesser Depression, see the December 2011 first tuesday article, Reeling from California’s lack of jobs.]