Half of What’s Wrong With the Recovery in One Chart

Simple national income and product accounting tells us that the current US recover (I can barely manage to type that without scare quotes and I *hate* scare quotes) has been horrible for two reasons: low government purchases of goods and services (G) and low housing investment. Consumption, fixed non residential investment, and inventory investment have recovered normally. Net exports didn’t fall.

The two possible (non exclusive) explanations of the extraordinary decline in real G during the recovery is that Republicans are stupid and that they are evil saboteurs. To be fair, Democrats and (especially) nonpartisan centrists too have flirted with austerity.

Before I go on (and on) the key graph explaining the slow recovery of housing investment shows the low and declining expected rate of house price appreciation. In addition to their well known house price index Case and Shiller survey the expected rate of increase of housing over the next ten years. The average over the random sample of 2000 is shown in the graph I steal below (via DINA ELBOGHDADY)


The dramatic decline in expected medium term house price appreciation is greater than the decline in the mortgage interest rate (about 3% from the business cycle peak to the low point of mortgage interest rates in 2013) so the expected cost of owner occupied housing services is extraordinarily high (meaning it is positive given maintenance and property taxes). The decline is 9% from the peak mania and about 5% from the business cycle peak. This is a sufficient explanation for low housing investment.

There are several other proposed explanations for the years with no recovery of real housing investment and very mild recovery since then. The most natural is that because of speculative overbuilding the US housing stock in 2008 exceeded demand given normal to sane expectations about house price appreciation so housing investment was naturally low until the adult population caught up. Brad DeLong has pointed out that this is nonsense more times than I care to link to (it was nonsense in 2011 and it is much more nonsensical now). Another proposed explanation is people got no jobs and no money — that young adults are living in mom’s basement because they can’t afford to buy or rent. This explanation lasted longer than the over supply of housing compared to trend, but it doesn’t explain why consumption has recovered and housing investment hasn’t US real per capita personal disposable income is higher than it ever was in the past (really). Finally and most nearly plausibly, it is argued that banks are once very badly burned twice shy so lending standards are extraordinarily strict. It is possible to reconcile this with low mortgage rates once loans are mad, but I think it’s hard to distinguish stricter than in the liar loan naughties from stricter than in the normal nineties. The available data are from surveys with respondents whose summary of tightness of standards must be subjective.

I have long guessed that the issue is declining expectations of house price appreciation, but only now found Case and Shiller’s graph (I should have used the google).

just for background a standard boring graph of NIPA components.


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