Housing equity withdrawal drove the bubble, not so much the building
Tim Duy also points to Bill McBride and Josh Lerner adding to the discussion of the narrative of housing in our economy and how that should affect policy. I would add of course the variety of responses by the mortgage industries (see Naked Capitalism) since that started in earnest round 1998 (MERS). I think this idea can be further refined and tied to other aspects of our troubles globally.
What Are We Expecting From Housing?, by Tim Duy: Josh Lehner and Bill McBride note that the manufacturing slowdown does not necessarily indicate recession, something I noted as well. Another version of that story is seen by comparing the ISM headline number with the new orders data:
…During the 2002-2005 period, arguably the height of the housing bubble, residential construction contributed an average of 0.4 percentage points to GDP growth each quarter. In the first quarter of this year, the contribution was 0.42 percentage points. So, barring the occasional pop in the data, housing is already contributing to GDP growth about what we would expect.
…Certainly we can envision accelerated home building triggering an increase in both manufacturing (capital equipment) and consumer (job/income growth) activity as well; these tend to be interconnected activities. So maybe the overall impact is a bit higher.
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So here is the question: What was more important in holding the economy close to potential output, residential construction itself, or the housing price bubble? I tend to believe the price-driven balance sheet effects were driving dynamics over this past business cycle. Absent a healing of household balance sheets (or, relatedly, monetary policy that supported such healing via somewhat higher inflation expectations to reduce debt in real terms), I would expect overall growth to remain subdued, despite a rebound in residential construction. The latter is helpful and important, but not by itself a magic bullet.
I am not seeing a manufacturing slowdown. Just a inventory correction. Lets note, the fact this did not occur in 2000’s was a bad bad sign. Credit was growing so fast, producers were not correcting like necessary. This caused a overload and bad inventory handlement. It was one of the reasons why the 2007-9 correction went as deep. They were expecting a rebound in growth in 2007 when they should have been conservative. When the credit turned off in 2 spurts, they died.
Easy free money drove the bubble.
Hi Dan:
I believe Tim and Bill are saying the withdrawal of equity from owned housing (> 2 years) and the access to easy mortgages coupled to the expectation of being able to refinance from short term ARMS with high caps and high increases (based on whatever index) was a component of the bubble.
I think I said this before in email and here also. The main driving factor was Greenspan telling the world he was not going to increase Fed Rates beyond what they were. This little un-noticed (or barely noticed) remark left a whole as big as a Mack truck for investments in that there were no safe lodgings for funds. This component of the bubble I believe to be far greater than the housing equity withdrawal developed during Clinton’s tenure. $billions of foreign currency looking for safe investment . . . the mortgage market. This was far more money than the home equity and also encouraged mortgage abuse as newer and riskier mortgages were developed as vehicles for investment.