Why Hasn’t the Housing Recovery Helped the Economic Recovery?

Most people are convinced that the housing crash contributed to the recession, even though the facts suggest otherwise.

Now people are convinced that the housing recovery has helped speed up the economic recovery:

The housing market is rebounding faster than anyone thought possible, according to Blackstone Group LP (BX)’s global head of real estate Jonathan Gray, as the Federal Reserve buys mortgage bonds to keep rates near record lows and investors sop up a diminishing supply of properties for sale.

.  .  .

Arizona’s capital city is leading the U.S. in price appreciation, surging 22 percent in the 12 months through October, according to an S&P/Case-Shiller index, which had the biggest year-over-year advance since May 2010. Eighteen of the 20 cities in the index showed increases from a year earlier.

.  .  .

Home values climbed by more than $1.3 trillion to $23.7 trillion since the end of 2011, according to Zillow, and prices will rise by 3.3 percent after an estimated 4.5 percent jump last year, based on estimates of 15 economists and housing analysts surveyed by Bloomberg. Sales of existing homes will increase about 7.2 percent in 2013 to 4.98 million, the highest since 2007.

.  .  .

The improving housing market has already helped the broader economy heal after the crash triggered the worst recession since the Great Depression. The unemployment rate has dropped to 7.8 percent, the lowest level since January 2009 and Fed officials in December projected economic growth in a range of 2 percent to 3.2 percent in 2013. Consumer spending, which accounts for about 70 percent of the economy, is also showing signs of improvement. Retail sales rose more than projected last month, according to Commerce Department figures today in Washington.

“For most middle class households, homes are by far their biggest asset,” Weaver said. “So once the housing market starts to recover it helps consumer spending, it helps the whole economy.”  (emphasis added.)

Nice theory, but there is just one problem.  The economy has grown no faster during the 2012 housing recovery, than during the previous few years.  Nor is it expected to grow faster in 2013.  That’s because monetary policy is only allowing for a bit over 4% NGDP growth (for 3 plus years.)  So any faith is the curative powers of a housing recovery are pretty much like the faith that the 2009 stimulus sped up recovery:

1.  It might me true.

2.  It doesn’t show up in the data.

3.  It all depends on how the Fed reacts to the housing recovery.  So far they haven’t reacted well.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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