Housing Slump Not Recession Culprit
In this piece from Reason Samuel Staley argues that the housing crisis can't be fully blamed for the economic recession.
"The housing industry simply can't live up to its reputation as a major driver of the U.S. economy. The housing industry's woes are really a symptom of larger economic problems, not the cause of a recession or downturn.
This observation may seem a bit odd. After all, economists at the National Association of Homebuilders estimate that the economic value produced by the housing industry may represent as much as 15 percent of the national economy. Every new home generates about $80,000 in new wages and 2.4 new jobs in construction and related industries. These are impressive numbers.
So, when the nation's largest mortgage lender, Countrywide, decides to sell out to Bank of America in the wake of record high foreclosure rates, and large homebuilders such as Levitt and Sons and KB Homes are either in bankruptcy or teetering on the edge, the economy has to suffer. Doesn't it?
Yes, but not in ways that would prompt an economic recession."
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born in a barn
Well, I certainly agree that housing alone is not the source of all ills in the economy. However, to say that housing is a "derived demand" and that employment produces the demand for housing shows a complete ignorance of the human condition. When I was a child I needed a roof over my head, but I had no job. When I was a student I needed an apartment, but I did not earn enough to pay for everything I was consuming. Now that I am working age I pay more than what I consume to subsidize those in the other stages of life, and when I retire - yes, I will still want a house to live in, maybe a city condo or a country cottage, and my desire for such and my ability to buy such - will have nothing to do with working. Housing is the second need of human beings - food being first. Security then comes in after you settle. To say the economy is driven by manufacturing and exports shows how far down the rabbit hole and away from reality these right-wing nutjobs have driven us. Wake up and feel your own flesh buddy. It's not made of green paper!
Another view on the housing slump
It's good to see an article that goes beyond the conventional wisdom that soaring housing prices are good for everyone and we should all put all of our money on risky spectulation schemes or thinking a thriving housing industry is the key sign of an American globally competitive economy.
"Homes are built only if the demand for them exists, and the demand can't exist without the production of goods and services that are sold elsewhere."
The demand may be illusory or propped up by "free money". Spectulators bid up the prices and houses were built or in the process of being built for homes that buyers couldn't afford in an economy swamped with more homes. 60 Minutes ran a nice report last night on how easily people with poor credit were approved because it made folks commissions and boosted business.
"Subprime loans represent just 6.5 percent of the overall home mortgage market. The vast majority of mortgages and homes are financially secure."
True but the media and some the presidential candidates are sure to focus on the fears that arise when the public sees visible reminders such as empty homes and sob stories of homeowners who were deceived or who banked on ever high housing prices.
Housing Supply And Demand
Staley writes: "Homes are built only if the demand for them exists, and the demand can't exist without the production of goods and services that are sold elsewhere."
Let's narrow this discussion from the causes of the currrent slump to the basic principle of economics that this statement ignores.
That principle is sometimes called "Say's law" and sometimes called "the identity of national product and national income."
The idea is that, whenever you sell a product, you create income for the producers of that product and a cost for the consumers of the product that are both equal to the price of the product and therefore to each other. The price of the product is income from the point of view of the people who are selling the product, and cost from the point of view of the people who are buying it. Therefore, selling products creates income that is enough to buy these products.
If people actually had no needs except for housing and no desire to buy any product other than housing, then they could have an economy based solely on housing: the income generated by producing housing would be enough to pay for all the housing.
It is not true of housing more than for anything else that people have to earn income elsewhere to pay for housing. Producing housing generates income just like producing anything else.
Charles Siegel