The Housing Illusion
Washington policies have only prolonged the pain.Financial markets took a big tumble Wednesday on a series of lackluster economic reports, but the more distressing news was intellectual. Despite at least a decade of contrary evidence, the media and business classes still clamor for a miraculous housing recovery that will save the U.S. economy. The sooner we shed this illusion, the faster America will return to more robust and sturdy growth.
The Standard & Poor's/Case-Shiller housing survey kicked off the latest bout of pessimism with news that home prices fell another 4.2% in the first quarter. Prices have fallen for eight straight months, after the false dawn of 2009-2010, and average home prices are down to levels last seen in 2002. The Case-Shiller 10- and 20-city indices are back to the level of 2003. Catastrophe, double-dip, threat to recovery! cried the crowd.
Price destruction is rarely fun, and it's especially painful for Americans who have come to think of their home as their main asset and retirement nest egg. Yet this mindset has been part of our economic problem. A home's main economic purpose is—or should be—shelter. During the mania of the last decade, housing too often became an investment out of proportion to any sensible contribution to national wealth and well-being.
Fueled by subsidies and easy credit, with mortgages guaranteed by taxpayers, we built McMansions and vacation condos on the assumption that prices would never fall. The resulting bubble saw prices rise faster than any time in modern history, so much so that even after four years they still have further to fall before they reach pre-mania levels.
The clamor to boost housing as an economic savior is especially odd because we've tried this before with dire or fruitless results. The start of the last decade's mania was Federal Reserve Chairman Alan Greenspan's attempt to boost housing to substitute for the impact of the dot-com crash and 9/11. It worked for a while but created the bubble that led to the panic and meltdown.
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Since the housing market began to turn in 2007, Washington has tried to keep prices from falling with every policy gimmick known to politics: Foreclosure mitigation, more guarantees from the FHA, higher guarantee thresholds from Fannie Mae and Freddie Mac, Fed purchase of mortgage assets, and the $8,000 home buyer's tax credit promoted by the White House and Georgia Republican Senator Johnny Isakson.
Their main result, other than subsidizing some Americans at the expense of others, has been to sustain the housing recession over a longer period of time. The price decline would have been sharper without them, but the recovery would have happened sooner and would probably be well underway by now.
Meanwhile, the decline in home prices is good news for millions of young families and renters who were once priced out of the housing market. The National Association of Home Builders and Wells Fargo maintain a Housing Opportunity Index that measures the percentage of American homes sold that are affordable to families earning the national median income. The nearby chart shows that nearly 63% of homes were affordable by median earners in 2000, but only 40.4% at the height of the mania in 2006. Today, median earners can afford nearly 75% of all homes sold.
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The larger economic theme here concerns the nature of what constitutes the kind of resilient, sturdy expansion that the U.S. needs. The Obama Administration and Chairman Ben Bernanke's Federal Reserve have bet on a recovery based on reflating asset prices with easy money, federal spending and temporary stimulus programs. Part of that bet was reflating the housing bubble.
The results are what we now see: higher stock prices for Americans lucky enough to own shares, but 2% growth and mediocre job creation, a housing recession stretching well into its fourth year, and soaring commodity prices that reduce real income growth.
Housing is a major part of the U.S. economy but it needs to shrink from its artificial, subsidized share of U.S. wealth to a level that is sustainable based on population, income and productivity growth. A healthier economy must be built on capital investment in plant and equipment, new ideas and new companies. We need an investment boom, not another housing bubble.
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