Understanding America's "Houseless" Recovery
Housing never quite made a comeback. Select any data point, excepting home prices, and no recovery is evident. Both single family housing starts and new one family houses sold are barely touching their previous lows. Home prices have risen, but this is due in part to constrained housing supply toward the later part of the current economic recovery. Housing simply did not bounce back with the vigor expected, and it shows no signs of doing so soon.
Every recovery is missing something. There was ample commentary about the “jobless” recoveries that began to appear in the 90’s, when blame landed on job polarization—the trend towards jobs at the high end of the spectrum and low end of the spectrum with fewer in the middle—and increasing productivity—or “output per worker”. The phenomenon could be due to structural shifts that antiquate certain jobs. In a 2003 speech, (during a jobless recovery), soon to be Federal Reserve Chair Bernanke stated he favored the increase in productivity view.
The current “houseless” recovery is somewhat different. While jobs have made it to their previous highs, single family home sales or construction are unlikely to make it back to their long term averages in the near future, forget surpassing the previous highs. This lack of resurgence has an effect on the broader economy. While housing itself does not constitute a significant portion of the US economy, its derivatives do. These include the non-contestable (or very low contestability) construction jobs, the boost to consumption which does make a significant portion of the economy, and the effects on other financial decisions of home ownership.
What is causing the Great Malaise to be a houseless recovery? For one, the homeownership rate in the US is in secular decline. This has been happening for a decade—long before the housing crisis accelerated the trend. Lower homeownership rates are especially evident in lower age groups. With less equity in their homes before the crisis, their wealth was the most susceptible to declines in home prices. Student debt may also be holding back first time buyers. This will take time to pay down. Much like the jobless recovery of the early 2000’s, the houseless recovery’s defining trend is not going to reverse quickly.
Granted, there are bright spots in the housing recovery. Multifamily housing starts have recovered to historical levels, and are even slightly higher than the trend prior to the recession. As the home ownership rate continues to fall, sustained demand is likely to continue. This may well be a more permanent trend than many are anticipating.
Understanding the houseless recovery enlightens some of the Federal Reserve decision making. The jobless recovery of the early 2000’s was at least partly responsible for the prolonged accommodativeness of the Fed before the Great Recession. There is, after all, a dual mandate that calls for the Fed to maintain stable prices and maximum employment—arguably impossible. In the Bernanke speech referenced earlier, he stated that due to subdued inflation the Federal Reserve could remain accommodative to support this recovery without being worried about potential negative consequences.
Does the same apply to the houseless recovery? The US has spent the last 5 years attempting to reach escape velocity and part of the reason for the struggle has been housing. In her testimony before Congress Fed Chair Yellen admitted that lower than expected housing activity could be “protracted”, but few are willing to admit that housing may not be coming back in the near term. Such an admission would have a considerable effect on the administration of monetary policy. It is time for the US to come to grips with the houseless recovery.