c.2019 New York Times News Service
The United States has had 11 recessions since the end of World War II. All but two were preceded by a big decline in the housing market.
Inside that bit of trivia lie some fundamental insights into housing’s outsized role in the business cycle, along with clues to suggest that the economy is on firmer footing than the increasingly pessimistic forecasts make it seem. The gist is this: The United States may or may not enter a recession this year, but if it does, housing is unlikely to be the cause, because it never really recovered in the first place.
“Housing is not in a position to lead this thing down,” said Edward Leamer, an economics professor at the University of California, Los Angeles.
How much it can help prolong the overall recovery is another matter. Home sales and prices have been sluggish in the face of rising interest rates. Still, the pace of construction, combined with pent-up demand from young adults, suggests that the sector should at least remain stable in the face of uncertainty elsewhere.
Why is housing so often a focus of anxiety as economic expansions run their course? Here are a few reasons.
— Housing is more volatile than bigger sectors.
Even though housing does not account for all that much of the economy, its role in recessions is huge, because it is highly cyclical and sensitive to interest rates. Think of expansions and recessions as the cycle of things that go up and down a lot. Housing is a big determinant of where that cycle is headed because, unlike many other sectors, it has massive swings.
The housing sector accounts for as little as 3 percent of economic output during recessions and about twice that during booms. Other pieces of the economy are much bigger, but they don’t change nearly as much from boom to bust. Government spending, for instance, has hovered between 17 percent and 20 percent of the economy for decades. The 3-percentage-point swing is about the same in each case, but government accounts for much more of the economy. Translation: Housing punches way above its weight.
As a result, while housing has never accounted for more than 7 percent of total output, it has on average accounted for about a quarter of the weakness in recessions since World War II, according to a 2007 paper by Leamer titled “Housing IS the Business Cycle.”
The most recent recession, from 2007 to 2009, offered one of the more exaggerated examples of housing’s guiding role in downturns. A recent report from the Federal Reserve Bank of St. Louis found that the construction sector accounted for a little over a third of the decline in output in the past recession, and about half of the job losses (a figure that includes laid-off construction workers and job losses in connected industries).
How does housing look now? Mixed, but mixed in such a way that the things most important to economic growth are the most stable.
— Prices have been discouraging buyers.
Measured in sales and prices, the housing sector appears to be in a precarious position. Existing-home sales were down about 10 percent in December from a year earlier, according to the National Association of Realtors. The group blamed rising prices and interest rates, and a lack of supply that has left buyers underwhelmed by their choices.
Much of the problem is that while job growth has been strong, home prices have gone up faster than incomes.
The sticker shock of rising prices, combined with rising interest rates that make monthly payments more expensive, scared off many buyers toward the end of last year. Some of that demand seemed to come back at the start of the year, after interest rates fell to roughly where they were a year ago.
Nevertheless, homes are sitting on the market longer, price cuts are becoming more common, and a number of homebuilders have had layoffs. Before a recent speech to 1,000 people from the housing industry, John Burns, founder of John Burns Real Estate Consulting, asked the audience to forecast the year ahead. They were evenly split between those seeing sales and price declines and those seeing growth.
“Everybody is being really cautious right now,” Burns said in an interview.
This all sounds very bad, but for anyone who isn’t trying to sell a home or in the business of selling homes, it’s not as bad as it seems.
— Builders are less bullish than in the past.
When economists talk about a recession in housing, they largely refer to construction, not home prices. Most of the industry’s contribution to annual gross domestic product lies in residential fixed investment, a category composed almost entirely of the building of single-family homes and apartment and condominium buildings (along with a small amount of home improvements and renovations).
Rising home prices help the economy in small but important ways, like making people feel richer and building up home equity that owners can tap and spend elsewhere. But increased spending from people feeling richer is not nearly as important as the pace of home sales and the volume of construction, since both of those create many jobs — for people like real estate agents and mortgage brokers on the sales side, and the architects, construction workers, electricians, plumbers and others who design and build new homes.
Home buying is weak and getting weaker, so that could be a concern. But construction is bordering on moribund. Total housing starts grew at an annual rate of 1.2 million a year in January, more than double the recession-era low of less than 500,000, but still well below an average of 1.5 million from 1990 to the start of the housing bust — despite an expanding population.
In other words: Housing is in recession already. It might not get better soon, but it probably won’t get worse.